STEP Market Convention Signed
Transcription
STEP Market Convention Signed
JULY 2006 VOL 1, ISSUE 89 ISSN 1469-2031 Contents STEP Market Convention Signed Features: • STEP Convention Signed Issuers of European short-term paper are now free to apply for a STEP (Short-Term European Paper) label, following the signing of the STEP Market Convention on June 9 2006. • ACI Unveils Operations Certificate in Manila • Optimism and Filipino Hospitality Mark 45th ACI World Congress • FXC Acts on Auto-Dealing • South Africa Holds Options Course • Central Bank Reserves Climb • Sri Lanka Association Praised by Central Bank • TMA Hong Kong to Set USD/HKD Rate • New Websites • OTC Derivatives Markets Continue to Grow • Canada Issues Invitation to Montreal World Congress • In Memoriam: Hans Lamme Franck Hebeisen The Market Convention is the cornerstone of the STEP initiative, which was set up in 2001 and is being led by ACI – The Financial Markets Association and supported by the Fédération Bancaire de l’Union Européenne (FBE). The initiative aims to foster the integration of the European market for shortterm paper through the convergence of market standards and practices. While the US market is integrated, the European commercial paper markets are segmented into several market places. As a result, issuers and investors in the European short-term paper markets are confronted with reduced depth and liquidity, and have less diversification opportunities than in the US. The STEP inititiative aims to promote a pan-European short term paper market through market players’ voluntary compliance with the standards set out in the STEP Market Convention. “Integration of the European markets will enhance market depth and liquidity and increase the diversification opportunities for issuers – both financial and non-financial institutions, and investors”, says Euribor ACI and EuriborFédération Bancaire Européenne, the two associations responsible for implementing the STEP initiative. “STEP is a normalisation of the short-term paper programmes in Europe. It is about transparency and harmonisation”, added Franck Hebeisen, chairman of the Euribor ACI STEP task force at an ACI meeting last month. For issuers who are STEP-compliant and apply to the STEP secretariat, a label will be granted. When short-term commercial paper or certificates of deposits earn the STEP label, they become “regulated”, which provides greater opportunities for European investors. Currently, European funds are restricted in the amount of unregulated paper they can buy. A STEP label lifts the 10% limit and allows European investors to increase their investment in short-term securities. Brussels Signing The STEP Market Convention, which is managed by the STEP Market Committee – comprised of 10 industry professionals appointed by the FBE and ACI – was signed on Friday June 9 2006 in Brussels by Guido Ravoet, Secretary General of Euribor FBE and Thierry Cazaux, president of Euribor ACI. It sets forth the criteria and requirements that short-term paper programmes must fulfil to be STEP-compliant, covering aspects such as information disclosure, the format for documentation, settlement, and the provision of data for the production of STEP statistics. To earn the label, issuers must apply to the STEP Secretariat, which has been created under the joint responsibility of Euribor FBE and Euribor ACI. Although the Secretariat is the only party that can award or rescind a STEP label, it has the support of the European System of Central Banks, which has expressed a willingness to contribute to the management of the label for two years after launch and to promote market transparency by permanently publishing statistics on yields and volumes on the website of the European Central Bank. This, it says, will foster integration and reduce issuers’ costs through greater market transparency. For programmes that have been granted the STEP label, the details will be made publicly available on the STEP Market website (www.stepmarket.org). A list of all the programmes that have been granted a STEP label will be displayed on the website and updated in accordance with the Market Convention. The STEP secretariat can withdraw the STEP label granted to a programme at any time, however, if it contravenes any of the articles of the Market Convention. Information on the procedure to apply is described on the website of ACI, as is the Market Convention. Both are also available from the STEP website, www.stepmarket.org. Issuers Feedback The signing of the convention follows a consultation period where, at the end of March 2006, Euribor ACI and Euribor FBE asked for feedback from large European issuers on the convention and procedures to obtain the STEP label. ACI says feedback from testers has been crucial in acting as the basis on which criteria of eligibility for programmes and issuers have been adapted. In addition the STEP label is now more user-friendly for some types of short term papers such as ECPs/ECDs without deteriorating the level of transparency and normalisation that this project aims to promote, the association adds. Last month Jean-Claude Trichet, President of the European Central Bank, gave a ringing endorsement to the STEP initiative during a presentation at the Cass Business School in London on European financial integration. “I expect that the market-led Short-Term European Paper initiative, the STEP initiative, will advance European integration,” he said. “The success of the STEP initiative will be proof that market-led initiatives are essential for the benefits of integrated financial markets in Europe to be reaped.” ACI Unveils Operations Certificate in Manila ACI – The Financial Markets Association unveiled the latest addition to its suite of examinations during the 45th World Congress in Manila. Andreas Gaus, Head of the ACI International Operations Working Group, told delegates in Manila that events in the global financial markets in recent years have served to raise the profile of reputational and operational risk higher than ever. This meant that an efficient operational team has become indispensable to all trading organisations – especially in those institutions offering prime brokerage or other back office outsourcing services. ACI’s Board of Education has developed the Operations Certificate to meet the needs of the evolving financial markets industry and set a standard for operational staff globally. It continues ACI’s efforts to promote and maintain the highest operational standards in the world’s financial markets. Marketbased organisations such as the New York Foreign Exchange Committee and the UK’s FX Joint Standing Committee have raised awareness of these issues by stressing the need for vigilance and best practice in operations departments. The new Operations Certificate is aimed at back- and middle-office staff, traders and vendors and helps to build understanding between trading and operational staff. The topic baskets in the new examination include: • • • • • • A front-to-end treasury view across all foreign exchange, money markets, derivatives and short term bonds and notes Deal capture, trade entry and confirmations Settlement, netting and clearing Reconciliation and investigations Treasury systems and data management Risk management, controls, compliance and documentation Developed in association with Germany’s Frankfurt Business School, candidates can study for and sit the new Operations Certificate – which is provided by a wide range of external training companies – in English or German. As with all ACI examinations, the ACI Operations Certificate will be open to both members and non-members of ACI – The Financial Markets Association. Optimism and Filipino Hospitality Mark 45th ACI World Congress President of the Republic of the Philippines, Her Excellency Gloria Macapagal-Arroyo, opened the day with a keynote speech The groundwork for bringing the annual ACI World Congress to the Philippines—the 17th country and the first Asian country to become a member of ACI-The Financial Markets Association in 1963—began years before the ACI flag was turned over by ACI Sweden to ACI Philippines at last year’s Congress in Stockholm. The flurry of preparations resulted in a world-class Congress attended by approximately 500 financial markets practitioners from the world over. The success of the Congress worked to dispel doubts as to the soundness of the state of the Philippine economy and security, and impressed foreign delegates who experienced first-hand the world-famous Filipino hospitality. The Philippines’ local colour and inherent optimism rubbed off on delegates to the 45th ACI World Congress, held in Manila last May 25 to 27, making the event uniquely memorable to its attendees. Interspersing serious business with festivities, every component of the Congress was a success—from the Reuters-ACI World Congress Golf Tournament that kicked off the event, all the way to the Gala Dinner and Dance on the last night of the Congress. Foreign delegates who registered for the Reuters-ACI World Congress Golf Tournament teed off with sponsors at the Orchard Golf and Country Club in Dasmariñas, Cavite, in the morning of the first day. Strictly Business May 26 kicked off on a high note with no less than the President of the Republic of the Philippines, Her Excellency Gloria Macapagal-Arroyo, opening the day with a keynote speech. In her address, President Arroyo, who referred to herself as a “proud and ardent saleswoman” of the country, led local delegates in welcoming foreign delegates to the Philippines. She expressed with utmost hope, “tempered by realism,” that foreign traders will find the Philippines worthy of [their] attention and investments. To show the government’s full support to ACI Philippines and the 45th ACI World Congress, the Chief Executive was also joined on stage by former Secretary of Finance and current Philippine Monetary Board member Juanita Amatong, and incumbent Finance Secretary Margarito Teves. After her welcome remarks, President Arroyo was ushered into the exhibition area for the formal ribbon-cutting ceremony, along with ACI Philippines president Jose Emmanuel Hilado, Teves and ACI-The Financial Markets Association president Godfried de Vidts. The series of presentations and panel discussions began with the keynote speech by Michael Powell, head of Global Markets at HSBC, entitled “From Queen’s Road to Canary Wharf: Lessons from Asia.” In his short talk, Powell walked the delegates back to 1996, when FX trading had a “much more human, more personable environment” and business was generally more vibrant, in contrast to the present business situation. For his part, ACI Philippines president Hilado likewise welcomed participants to the Philippines and the 45th ACI World Congress, which he described as a “very significant milestone in the history of ACI Philippines.” Hilado further explained that the theme, “Rising to the Challenge,” was in recognition of the increasingly borderless world, which has spawned the acceleration of capital movements around the globe. He invited the delegates to look forward to a programme that aimed to dissect the present challenges through relevant speeches, presentations and panel discussions. The first panel discussion focused on the topic, “Rationalizing Credit Rating Agencies,” and was moderated by Cezar Consing, partner at The Rohatyn Group. Panelists included: Citigroup Global Markets managing director Stephen Taran, head of JP Morgan Credit Rating Advisory for Asia Pacific Stephen Long, Fitch Ratings senior director and Asia Sovereign Ratings head James McCormack, and UBS AG head of Country Risk Analysis Max Schieler. The discussion that ensued focused on the relevance of credit rating agencies and on the implications of credit ratings that have proven to be inaccurate. The briefing on New Operations Certificate, delivered by Andreas Gaus, head of the ACI International Operations Working Group, followed the panel discussion. In his presentation, Gaus formally launched the New ACI Operations Certificate which is the updated and expanded version of the ACI Settlements Certificate. The afternoon session was opened by author and clinical psychologist, Dr. Margarita Holmes, who delivered a rousing talk on “Trading Up in Life, Love and Lust”. This was followed shortly by the panel discussion on interest rates, titled “Post-Greenspan: Impact on Global Interest Rates and Capital Markets.” The panel established expectations on very gradual interest hikes on a regional basis, as governments remain concerned about the growth of the economy. The panel was moderated by Jose Isidro Camacho, Credit Suisse First Boston vice-chairman for Non-Japan Asia, Investment Banking. Panellists included: Michael Spencer, chief economist for Asia and head of Global Markets Research at Deutsche Bank; Chua Hak Bin, director of Asia Pacific Economic and Market Analysis, Citigroup; and Dr. Andrew Freris, chief economist and head of Fixed Income Research for Asia-Pacific, BNP Paribas. The day’s programme concluded with the General Assembly, highlighted by a speech from ACI-The Financial Markets Association president Godfried de Vidts and followed by presentations by the respective Committee Heads. Day Two May 26, the second day of the Congress proper, began with the panel on foreign exchange, titled “Evolution of Currencies: Fixed to Floating and National to Regional”. Panellists Richard Yetsenga, HSBC currency strategist; Yianos Kontopoulos, Merrill Lynch managing director and chief global FX strategist; Robin Poynder, Reuters global head for FX Customer Propositions, Treasury and Fixed Income, and Thio Chin Loo, BNP Paribas senior currency analyst, joined panel moderator William Pesek, columnist at Bloomberg. The discussion zeroed in on how much more currency flexibility the Asian region needs to see. This was in line with the observation that Asian currencies presently lie somewhere in between the spectrum of FX modelling—with fixed on the one end and flexible on the other. The feasibility of a regional currency for Asia was also discussed and most of the panellists were of the opinion that it cannot yet happen in the immediate future given the differences in political systems and level of economic development. The last panel focused on regulatory issues and discussed “Adopting Basel II: Changing Financial Markets Landscape.” The panel was moderated by David Clark, honorary president of ACI-The Financial Markets Association, and had Eli Remolona, head of Financial Markets at Bank for International Settlements; Nestor Espenilla, Deputy Governor of Bangko Sentral ng Pilipinas; and Loh Boon Chye, head of Global Markets for Asia at Deutsche Bank AG, as panellists. The panel dissected Basel II and how it would affect the treasury business. It was an interesting discussion as it brought home the message that market practitioners have to prepare for these changes if they want to remain competitive and profitable. The second day’s session was capped off by a keynote speech on the Congress theme, “Rising to the Challenge,” delivered by Kevan Watts, chairman of Merrill Lynch International Incorporated and senior vice president of Merrill Lynch and Company, Inc. Social Events Complementing the business conferences were the world-class social events that showcased the Philippines’ colourful culture through performances by home grown Filipino talents. The ACI Council heads from different countries, delegates, sponsors, VIPs, and members of the ACI Philippines Organizing Committee were treated to a night of classical music and fashion at the Ayala Museum on the night of May 25. Dubbed as “The Filipino…Up Close and Personal” and sponsored by Tullett Prebon, the cocktails featured classical and kundiman (traditional Filipino music) repertoire performed by RSVP String Ensemble, as well as creations by renowned Filipino fashion designer Barge Ramos. It was a unique evening as the fashion models ended up socialising with the guests. The social event on May 26 was held at the Coconut Palace Museum, and carried the theme “Pais Tropicale.” Sponsored by Banco de Oro Universal Bank, the welcome cocktail reception featured performances by singers May Bayot and Nyko Maca. Samba de Orfeo dished tropical-inspired music as male and female dancers encouraged guests to let their hair down and join them on the dance floor. The night of May 27 was Fiesta Filipina night at the Harbor Garden Tent, Philippine Plaza Hotel. Sponsored by the Department of Tourism and HSBC, the entire programme was a celebration of Filipino culture in music, dance and fashion. Performers wearing traditional Filipino costumes blew native horns to welcome the visitors early in the night. As the night progressed, the Jammers, Pangkat Kawayan (Bamboo Group) and PUP Banda Kawayan (Bamboo Orchestra) made music using unconventional bamboo instruments while the guests wined and dined. The festive mood peaked as approximately 250 performing artists from the Cultural Center of the Philippines—all in full Filipiniana regalia—shared the stage for a grand song-and-dance production. Not to be outdone, the Merrill Lynch-sponsored Gala Dinner and Dance at the Makati Shangri-La Hotel’s Grand Ballroom on May 27 was equally exciting. Standards performed by the Philippines’ foremost vocal group, The Company, set the mood for a memorable night for both the local and foreign delegates. After a few sets, the group gave way for ACI Philippines president Hilado and Organizing Committee chairman Jose Arnulfo Veloso to lead the ceremonial turnover of the ACI flag to the next ACI World Congress host. ACI Canada president Sharon Grewal was called onstage to receive the ACI flag and deliver a short message of invitation to the 46th ACI World Congress in Montreal. After which, Hilado and Veloso formally thanked the delegates for coming to Manila to participate in the 45th ACI World Congress. The two likewise invited the other members of the Organizing Committee to come up and be recognized for the ceremonial toast. Finally, ACI-The Financial Markets Association president Godfried de Vidts proposed a toast to ACI Philippines by saying: “Is the Philippines an emerging country? After what I have seen in the last few days, it is not. It’s an emerged country!” As soon as the stage was cleared, the all-female trio Mocha stole the scene with their stirring renditions of disco music. The delegates then took the cue to loosen up. In minutes, the dance floor was crowded as delegates paired up with dance instructors at the centre of the floor, and danced tirelessly until way past midnight. Aftermath In hindsight, more than being the biggest milestone yet in the history of ACI Philippines, the 45th ACI World Congress also proved to be a major lesson in rising to the challenge. “True to its theme, the success of the event was, more than anything, a showcase of the Filipino’s ‘can do’ attitude,” said Hilado. Despite the challenges that the Organizing Committee faced —regional security issues, the impeachment complaint against the President, the state of emergency— ACI Philippines did Rise to the Challenge and delivered a world-class event in an environment of warm hospitality that the country is known for. FXC Acts on Auto-Dealing The New York Foreign Exchange Committee (FXC), which operates under the auspices of the Federal Reserve Bank of New York, has issued best practice guidelines aimed at the boom in algorithmic trading of FX products. The FXC says that recent auto-dealing product and technology developments have led to changes in market practice for participants in market and that it acknowledges “the need to assess the impact of these developments on market conditions and emphasise best practices that address the risks of participating in the changing environment”. Algorithmic trading has grown intensely in FX over the past year in particular as more and more firms take advantage of deep, streaming liquidity in the market. Many of these firms have moved in from the equity and exchangetraded fixed income markets and with their very fast technology have proved to be something of a thorn in the side of the banks – especially those firms conducting “latency arbitrage”. As far as the FXC is concerned, it says that the market impact of algorithmic trading include; • In periods of low price volatility, the increased number of bids and offers in the market from auto-dealing participants may enhance market liquidity for all market participants. ● When new information is introduced to the market, the market reacts more quickly than was possible before the advent of auto-dealing. Auto-dealing market participants are interconnected via systems with minimal human intervention. This connectivity can bring temporary challenges to manual dealers trying to access liquidity in competition with computer programs, particularly in the moments following the release of new information. ● Prices are quoted and canceled far more frequently in the automated environment than they were in the previous environment that permitted only manual dealing. ● Many new participants have entered the foreign exchange market, specifically hedge funds and proprietary traders that have experience accessing markets other than foreign exchange through auto-dealing interfaces. ● Systematic traders may pursue the strategy of placing bids and offers on one platform, outside of prices that are available on other platforms, to arbitrage liquidity and credit. This type of trading activity may give the illusion of more liquidity in the market than may actually be available at a given point in time. ● Increased price transparency and secondary market access to additional pools of automated liquidity have reduced bid-offer spreads and margins earned by market-making banks from their customer business. ● Latency differences – differences in the reaction times of systems technology – may arise between platforms and bank systems. These differences may provide arbitrage opportunities for some auto-dealing models. ● Some market participants have expressed concerns about auto-dealing stratagems that appear designed to artificially influence prices. Such schemes may raise reputational issues for the market and for those who provide access to the market. “In summary, auto-dealing has altered the landscape of the foreign exchange market by increasing both deal flow and the number of market participants, deepening liquidity during periods of low volatility, and accelerating the development of straight-through processing capabilities,” the FXC says. “As a result, auto-dealing has improved the overall operational efficiency of the dealing community. At the same time, auto-dealing has added to the number of transactions conducted anonymously through prime-brokerage facilities, and it has heightened the sensitivity of market participants to the performance of their technologies and the capacity of their infrastructures.” To meet the challenges of the new generation of traders entering the market, the FXFC is issuing guidelines for dealers and prime brokers. As in all advice provided by the FXC, the guidelines are not legally binding but constitute what the Committee considers to be “best practice”. The FXC stresses the importance of banks and prime brokers reviewing their procedures and policies to ensure they are up-to-date on the challenges they are facing from the new generation of counterparties and their response to those challenges. These are; Ensure adequate risk management and technology when operating in the auto-dealing space Apprise new market entrants of professional practices and standards of behaviour Monitor reputational risks and confidentiality issues Manage Latency Issues In conclusion, the FXC says that the dynamic nature of the foreign exchange market will continue to facilitate the entrance of new participants and technologies into the marketplace. Within this context, the significant and growing role of auto-dealing should be viewed as a healthy and natural progression. The self-regulatory nature of the foreign exchange market and the global span of its entire suite of products will continue to ensure that the foreign exchange market is on the forefront of innovation within the world’s capital markets. Auto-dealing will likely continue to be an important part of this environment. As such, it is imperative that market participants be cognisant of the challenges and opportunities that auto-dealing presents for all parties. Liquidity providers should make sure that they possess the technology required to provide the necessary infrastructure and risk management tools in the auto-dealing space. Additionally, banks providing prime-brokerage services in the auto-dealing environment should be particularly aware of the fact that clients are transacting in the prime broker’s name and prepared to investigate a complaint by an executing dealer that their customer may have engaged in illegal or unethical trading practices. Whenever possible, banks should refer new market entrants to existing best practices for guidance on appropriate conduct. South Africa Holds Options Course ACI South Africa recently organised a five-day workshop in Johannesburg on Foreign Exchange Options, which culminated in a practical and theoretical examination and an award of the ACI South Africa FX Options Certificate to the successful candidates. The workshop is presented at an intermediate level, and is facilitated by Peter Skerritt & Associates, a pan-African training company specialising in derivatives. “Options are undoubtedly the most complex of the instruments in the foreign exchange market,” observes Roy Daniels, President of ACI South Africa. “And we hope that this initiative will lead to the wider acceptance of formal standards for the accreditation of option dealers at a practical level, to complement the theory of the ACI Dealing Certificate and Diploma in this area.” The workshop attracted delegates from several African countries where foreign exchange options markets are currently being developed. A real-life simulation environment was created for portfolio management, and interbank, client, and broker dealing via the use of Fenics FX, the FX options pricing and risk management system from GFI Group. “The fact that implied volatilities almost doubled in the real South African rand options market during the week of the workshop provided an exciting backdrop to the risk management and trading sessions,” adds Peter Skerritt, the workshop facilitator. “Truth can indeed be stranger than fiction”. Similar workshops are planned over the next twelve months in the US, UK, and Dubai. For more details, please contact [email protected]. Central Banks’ Reserve Accumulation Continues Typically, reserve accumulation has been an Asian phenomenon as dollar reserve accumulation exploded in the early years of this century, but now the net is widening. So what, if any, influence (beyond funding the ballooning US deficit) is the high level of reserve accumulation having? Recent data from the IMF says that reserves held as at September 2005 were in excess of $4 trillion, up from $1.2 trillion in 1996, meaning the central banks have a lot more money to manage and play with. It is worth remembering that the hedge fund sector is seen as very influential even though most surveys suggest it has slightly in excess of $1 trillion of assets under management. The European Central Bank (ECB) has published a working paper studying the growth in reserve accumulation, within which it notes that, “The impressive pace of reserve growth has become an important issue on the international policy agenda and has been considered from various perspectives, including the financing of the growing US current account deficits, the debate on high net savings in the Asian economies and oil exporting countries, the sustainability of reserve accumulation, and the factors behind exceptionally low yields within and outside the United States.” The paper was produced by the International Relations Committee (IRC) task force established under the auspices of the European System of Central Banks. It investigates the features, drivers, risks and costs of reserve accumulation, as well as the other uses that countries have been making of their foreign assets. The report also reviews the main trends in reserve management and provides evidence for the impact of reserve accumulation on yields and asset prices. The paper notes that reserve accumulation in recent years has exhibited four features that “seem largely unprecedented”. Three of these features became particularly prominent in 2002-04, the paper states. Firstly, world reserves grew by around 85% (or 91% if the first eight months of 2005 are included), at a pace three times faster than in 1999-2001. Secondly, monetary authorities in Asia, until March 2004, accounted for the bulk of the accumulation, and eight of them are currently among the 10 largest reserve holders. Thirdly, fewer official creditors held an increasingly larger share of the total accumulation. The top five reserve accumulating central banks, which accounted for almost 57% of the total reserve accumulation on average in the period 1995-2001, increased their share to more than 68% of the total world accumulation in 2004. The top two, Japan and China, accounted for about half of the total world accumulation in 2002-04, and currently hold around 40% of the total world stock of reserves. “A fourth, equally important development has come about more recently,” the paper adds. “The oil-exporting countries, whose combined current account surplus is estimated to have exceeded that of the Asian economies in 2005, have emerged as a new major group of net capital exporters in the world economy. They, however, have accumulated assets not only in the form of “traditional” reserves, but also by building up foreign assets in so-called oil funds – a phenomenon that is not yet fully captured by the available statistics, including those on the financing of the US external deficit.” Drivers The paper sees three main drivers behind the growth in reserve accumulation, in addition to the more recent oil price hike. First, in the aftermath of the financial crises that occurred in the 1990s and early 2000s, many emerging market economies (EMEs) felt the need to self insure against future crises. Second, at the beginning of their recoveries and following strong depreciation of their currencies, the crisis-hit Asian economies pursued export-led growth supported by exchange rate regimes anchoring their currency, de jure or de facto, to the US dollar. Third, it continues, certain features of the domestic financial systems of EMEs, especially in Asia, are likely to have played a role. Such characteristics relate mainly to their under-developed local financial systems, entailing difficulties in properly channelling domestic private savings to investment as well as inefficient and/or costly hedging markets. They also relate to the resultant tendency towards dollarisation of official and/or private cross-border assets on the part of certain creditor EMEs; and, from a macro viewpoint, an excess of domestic savings over investment driven by either a savings glut (e.g. China) or an investment drought (other Asian emerging market economies). “All these features have significant links to reserve accumulation,” the paper states. The paper also identifies one aspect of reserve accumulation that most nations have in common – the role played by the build-up of official foreign assets both as an outcome of and an instrument for integration of the EMEs concerned into the global financial markets. “Several emerging countries, especially in Asia, have in fact become major players in international trade but are still underdeveloped from a financial angle,” the paper states. “This asymmetry is probably one reason why EMEs now hold around two-thirds of world reserves compared with less than 30% at the end of the Bretton Woods period, whereas the total reserves of mature economies with complete and deep financial markets, excluding Japan, have remained stable at around USD 500 billion since the early 1990s.” Risks and Impact Nothing is straightforward in the financial markets, of course, so the paper identifies potential risks and costs arising from the surge in reserve growth. It highlights inflationary pressure, over-investment, asset bubbles, complications in the management of monetary policy, potentially sizeable capital losses on monetary authorities’ balance sheets, sterilisation costs, segmentation of the public debt market and misallocation of domestic banks’ lending as the chief areas of focus. “Two other noteworthy developments have been recorded in several economies in recent years,” it suggests. “First, some progress has been made towards more active management of official reserves, resulting, for instance, in investment in a more diversified range of instruments with longer maturities. Second, a substantial share of official foreign assets has been channelled into vehicles with purposes other than reserve holding.” Regarding the impact of reserve accumulation on yields, the paper notes that estimates of the effect of intervention on US Treasury yields are quite different, and range from negligible to 200 basis points. “This paper shows that purchases of US government debt securities by Asian monetary authorities might have affected the level and dynamics of their yields; in particular, there is some evidence that Japanese purchases of US Treasuries might have had an impact of around 65 basis points on three-year US Treasury yields at the time of the most sizeable interventions. Looking forward, the overall market impact of portfolio changes could differ, depending on the preferences of the private sector.” Sri Lankan Association Wins Praise from Central Bank The Sri Lanka Forex Association (SLFA) has won the support of the country’s central bank for ACI’s education efforts in the region. Speaking at the opening ceremony of the recent ACI Australia Dealing Simulation Course held in Colombo, Dr A.G. Karunasena, Assistant Governor of the Central Bank of Sri Lanka, told delegates and attendees that the central bank has given its blessing to the initiative to introduce an accreditation programme based around the ACI suite of examinations and qualifications. Referring to the Dealing Simulation Course itself, and the fact that it trains and equips dealers with dealing skills, needed for a fast developing financial market in an increasingly globalised environment, Dr Karunasena said, “Training such personnel is very important at present and it is a national requirement, as a vision of the country is to develop Colombo as a financial centre.” Under the present floating exchange rate regime, one of the objectives of the Central Bank of Sri Lanka is to ensure an orderly adjustment of the exchange rate, with excessive volatility, reflecting changes in the macro-economic fundamentals of the country, Dr Karunasera told delegates and local officials, adding that the central bank considered it necessary to encourage the use of new forex market products. He also revealed that the central bank has recently granted approval to introduce derivative and hedging instruments to the domestic FX market. “Dealers, however, should be well trained on the use of such instruments which are somewhat complex,” he added. “Therefore I am grateful to the Sri Lanka Forex Association for arranging this programme which is timely.” Dr Karunasera then pointed out the necessity to formalise mechanisms to ensure local markets adopt best practices and safeguard end-users, while conforming to the highest professional standards. “We, in the central bank, fell it is necessary to do more to deepen and widen the foreign exchange market in Sri Lanka, which is characterised by thin volumes, constant lack of live twoway quotes and lack of hedging instruments,” he observed. “I hope that all participants may take the maximum benefit out of this programme and make use of the knowledge gained to address such weaknesses in the domestic foreign exchange market.” The Assistant Governor also had special praise for the SLFA and its “valuable contribution” to the market’s development through the various measures taken to develolp a healthy and robust domestic market by focusing on people, education and accreditation. Referring to an agreement between SLFFA and ACI Australia for the latter to support Sri Lanka’s move towards a formal qualification, Dr Karunasera said the central bank “always encourages this kind of development and appreciates the commitment of the Sri Lanka Forex Association to develop professionalism and to elevate the overall standards of the [domestic] foreign exchange market”. The SLFA has presented to the central bank of the introduction of the ACI qualification in Sri Lanka and “the central bank has given its blessing to the initiative and agreed to help in developing a fully-fledged qualification in Sri Lanka,” Dr Karunasera revealed to the audience. “The central bank has also agreed with the Sri Lanka Forex Association to establish a committee to adopt the ACI Model Code in order to ensure that the financial markets adopt best practices,” the Assistant Governor concluded. “Meanwhile the senior management of the central bank has initiated to encourage the CEOs of commercial banks and other financial institutions to recognise ACI qualification for recruitment and career advancement of their offices since it is a useful and important qualification for their forex dealers and treasury managers.” New Websites for Malta and Russia: Italy Site Now Available in English The National Associations in Malta and Russia have released their new websites. Members of ACI- The Financial Markets Association can keep up to date with events in both countries by going to www.acimalta.com, and www.acirussia.ru. Separately, ACI Italy has added an English version to its website www.aticforex.com. The new language version will be available from July 20, 2006. TMA Hong Kong Launches Spot USD/HKD Fixing Rate Eddie Tan The Treasury Markets Association (TMA), which incorporates ACI’s Hong Kong National Association, recently launched the Spot USD/HKD Fixing to provide investors with a reference rate for the pricing of Hong Kong dollar-linked currency products. Market data vendor Reuters was selected as the official exclusive calculator and distributor of the fixing rate. The rate is calculated by averaging the middle quotes after excluding the highest three quotes and lowest three quotes from contributed rates provided by 20 banks designated by the TMA. “The availability of a representative fixing for the spot USD/HKD exchange rates will be conducive to the further development of the Hong Kong dollarrelated currency products in Hong Kong,” says Eddie Tan, Chairman of the TMA Codes and Standards Committee, which developed the fixing in consultation with market participants. The spot USD/HKD fixing will serve as a benchmark for the market exchange rates of USD against HKD at 11:00 a.m. Hong Kong time. The calculated spot USD/HKD fixing will then be published on both Reuters RIC <HKDFIX=> and Reuters page <HKDFIX> at 11:15 a.m. from Monday to Friday, except public holidays. “Market participants have noted that many banks have launched innovative FX-linked structured products in the markets and this fixing is intended to meet their needs to reference a benchmark HKD rate,” says Kenneth Tsui, Managing Director in Reuters North Asia. OTC Derivatives Activity Rises Again in H2 2005 Activity in the OTC derivatives market, as measured by the Bank for International Settlements’ (BIS) semi-annual survey of outstandings continues to rise, however for the second successive survey period, the pace of growth has slowed. Overall notional amounts outstanding (excluding credit derivatives) rose to $284,819 billion as ay end-December 2005, compared to $271,282 billion at end-June 2005 and $251,499 billion at the end of 2004. Gross market values, which measure the cost of replacing all contracts, declined to $9,139 billion from $10,417 billion at end-June 2005. All published figures in the statistics are adjusted for double-counting resulting from positions between reporting institutions. Notional amounts outstanding were adjusted by halving positions in relation to other reporting dealers. Gross market values were adjusted by adding the total gross positive market value of contracts to the gross negative market value of contracts with non-reporting counterparties only. Outstandings in the largest segment of the OTC derivatives market – interest rate contracts – rose to $215,237 billion from $204,795 billion six months previously. Within this, the numbers in all three categories – FRAs, interest rate swaps (IRS) and interest rate options – rose, FRAs from $13,973 billion to $14,483 billion; IRSs from $163,749 billion to $172,869 billion; and options from $27,072 billion to $27,885 billion. Regarding the pace of growth in the interest rate sector, which stood at 5% compared to double-digit growth during the first half of the decade, the BIS says it is too early to say whether it is a temporary blip or the start of a more permanent trend, perhaps reflecting the maturing of the market. “What is clear is that the rates of growth in the OTC market outstrip those recorded on organised derivatives exchanges,” the BIS states. Financial institutions dominate usage of interest rate products, with just $25,092 billion of the $215 billion outstandings being with non-financial customers. Conversely, in terms of currencies and tenors, the data is more evenly spread. Up to one year (residual maturity) recorded $69,091 billion, from one-to-five years $88,402 billion and over five years $57,744 billion. In currency terms, the euro continues to be the most actively-traded currency, with $82,641 billion outstanding, followed closely by the US dollar with $75,354 billion outstanding. There is then a sizeable gap to outstandings in Japanese yen ($26,561 billion) and sterling ($15,248 billion). Exchange traded interest rate contracts outstanding stood at $52,300 billion at the end of the year, a drop from end-June’s $53,794 billion, but well up on the previous year’s $42,769 billion. FX Continues Steady Progress Outstanding amounts in foreign exchange contracts also continued to rise, and again it was at a slower pace than previously. Total outstandings stood at $31,609 billion as at end-December 2005, up from $31,081 billion six months previous and $29,289 billion a year before. The most dominant sector was outright forwards and forex swaps with $15,915 billion outstanding (up very slightly from $15,801 billion in June 2005), followed by currency swaps at $8,501 billion ($8,236 billion) and FX options at $7,193 billion ($7,045 billion). Exchange traded contracts outstanding stood at $172 billion, slightly up from June’s $170 billion. Gross market values in FX contracts fell back from June’s $1,141 billion to $998 billion – this represents a continued decline from December 2004’s $1,546 billion outstanding. Reporting Dealers ($12,092 billion, a slight decline from six months before) and Other Financial Institutions ($13,039 billion from $12,334 billion) made up the majority of FX activity, with Non-Financial customers accounting for $6,479 billion from $6,568 billion at end-June. FX activity is heavily weighted at the shorter end, with $24,134 billion having less than a year to maturity, $5,180 billion from one-to-five years and $2,295 billion more than five years. Unlike the interest rate segment, the US dollar dominates activity, being responsible for $26,364 billion of outstandings, followed by the euro at $12,870 billion, the yen at $7,793 billion and sterling at $4,422 billion. The BIS does note, however, that the US dollar’s share of the market – at 83% - is its lowest since the BIS started collecting data in 1983. As well as highlighting strong growth in outstandings in the yen (from $6,907 billion to $7,793 billion), the BIS also notes strong growth in the Australian (20%) and New Zealand dollars (60%). “This may be related to the strong issuance of eurokiwi and uridashi bonds,” suggests the BIS. “The New Zealand dollar has recently overtaken the Australian dollar as the leading currency in [the uridashi] market due to the high yields offered in that currency.” Issuers of eurokiwis and uridashis tend to swap the proceeds into other currencies, and as such in this case are a natural counterparty for New Zealand banks issuing in foreign currency or for traders speculating on a decline in the NZ dollar (which was in fact very stable during the survey period). “Another factor behind the massive growth of the NZ dollar derivatives market could be the increased use of currency swaps for liquidity operations by the Reserve Bank of New Zealand, at least to the extent that these operations are with reporting dealers and not local or Australian institutions not included in the sample,” adds the BIS. Credit Growth Also Slows Notional amounts in credit default swaps (CDSs) also rose during the second half of 2005, also at a slower rate than previously. Total notional outstandings stood at $13,698 billion at end-December 2005, up from $10,211 trillion at end-June 2005 and $6,397 billion at the end of 2004, the first time the BIS collated CDS statistics. Gross market values rose from $264 billion to $346 billion. The total notional amount is calculated by adding together contracts bought and sold and deducting 50% of the total of contracts bought and sold between reporting dealers, who make up almost 65% of the market. “The data do not confirm fears that the emergence of a liquid credit derivatives market has led to a large-scale transfer of risks from the banking to the insurance sector,” states the BIS. “Insurance corporations accounted for $180 billion (2%) of the protection bought, and purchased $60 billion (less than 1%) of the protection sold by the reporting dealers. “While it is possible that these aggregates hide some sizeable individual exposures, they certainly do not support a picture in which insurance companies purchase CDSs to take on credit risk on a massive scale,” it adds. “That said, it must be pointed out that the BIS data do not contain information on instruments other than CDSs (including synthetic CDOs) that could be used to transfer credit risk across sectors.” Single name instruments made up the majority of CDS outstandings at $10,217 billion, up from $7,311 billion at end-June and $5,116 billion at endDecember 2004. Elsewhere, activity increased in the other segments measured by the BIS. Equity-linked contracts outstanding rose from $4,551 billion at end-June 2005, to $5,057 billion; and commodity contracts outstanding rose from $2,940 billion to $3,608 billion. The two segments were the fastest growing in the second half of 2005. Jamaluddin Appointed Chairman of ACI Board of Education ACI – The Financial Markets Association’s Council has unanimously elected Saad Jamaluddin as the new Chairman of the ACI Board of Education. Mr. Jamaluddin works for Arab Finance House SAL (Islamic Bank) as Senior Executive Manager, Treasury & Correspondent Banking in Beirut, Lebanon. He has a broad and respected experience in financial markets and is considered the pioneer in introducing Islamic Treasury products to the Lebanese Financial Markets and its banking industry. Mr. Jamaluddin was appointed President of ACI Lebanon in 2003 after serving as its Secretary from 1997. He was a member of the Board of Education in recent years and significantly contributed to the progress in education provided by ACI – The Financial Markets Association. ACI would like to thank Carlene Crnkovich, who chaired the Board of Education for the last three years, and wish her every success for the future. From now on ACI will concentrate all its offices, including Education, at its Paris location to further enhance communication and internal efficiency. The quality of service rendered by ACI – The Financial Markets Association, and the commitment to service the banking industry and its 13.000 members in particular in the educational area remains unchanged. In other news, Ann McGoff has resigned from her post of Head of ACI’s Education Operations effective July 7, 2006. ACI would like to thank her for all her hard work and wish her all the very best for the future. For any assistance and questions regarding ACI Education please contact Saad Jamaluddin or Jean Pierre Ravise, ACI Managing Director. In Memoriam: Hans Lamme Hans spent almost all his career at ABN Amro and will be remembered as a warm and very dedicated person by all that worked with him. Hans was a key driver in the success of the Treasury within the former Amro bank, always focused on growing the business in the best interest of the bank and its employees. In more recent years at ABN Amro, he was a major force in expanding the FX options business and building the first real global trading book within the bank. This was a major breakthrough in the way the bank conducts its business and was exemplary for many other product lines. As a representative for ABN Amro, Hans became a member of the Board of ACI, Netherlands as a secretary from 1989 to 1997. This was a tailor-made job for his qualifications and skills. He delivered in that respect an important contribution to the success of EUROFOREX´95 in Amsterdam in 1995. Because of his personality and knowledge of market practices he was asked by ACI Paris to become a member of the Committee for Professionalism. In the last part of his professional career, his expertise on the markets, products and the bank was instrumental in ensuring a successful transition to the Euro for ABN Amro, as well as having Financial Markets smoothly passing the much-feared Y2K point. We will miss Hans and wish his family the strength to overcome this loss.