Five predictions for 2017

I think there is a world market for maybe five computers

IBM President (supposedly) in 1943

Committing predictions to writing is a wonderfully effective way to appear foolish at some future date when they’re reviewed with the benefit of hindsight.

Still, there’s no fun in sitting on the sidelines. Here are five topics that seem important as we begin 2017.

1.      Clearing of FX swaps

With voluntary NDF clearing picking up steam and cleared IRS already a huge success, 2017 may be the year this finally happens. I’m not the only person to think so: last year saw an exchange group purchase a major OTC venue and publicly announce plans to extend the product suite. Banks, who may historically have been lukewarm, are now looking at the ROE of their swaps businesses, post implementation of the Leverage Ratio rules, and are likely to be supportive of such a move. Expect the market structure to look like it does in Rates where large interbank institutions clear amongst themselves but corporates continue to hedge exposure bilaterally with their banks. Keep an eye out for key ECN launching electronic swaps offerings in 2017: clearly electronic volumes would explode upon the market moving cleared.

2.      Volume growth

After a subdued macro environment (uniformly low rates; depressed realised volatility with episodic crashes) things are looking more lively. The geopolitical environment seems likely to provide sustained volatility whilst interest rates are rising and will begin to diverge, which ought to see more carry trade activity. Secular shifts across fixed income and equities alongside increased corporate hedging should both contribute to increased overall FX activity. Expect 2017 to be a good year for those that remained committed to the FX business and look for the CLOBs to be outsized beneficiaries in periods of heightened volatility when internalisation drops.

3.      The year of the regional bank

A constellation of factors are working in favour of regional banks. Key real money accounts and global corporates, attracted by the credit ratings, are enquiring how they can work together more closely. The technology required to run a scaled eFX business – with internalisation, analytics and so on – is now available from a number of SaaS providers at a fraction of the price it would have cost to develop in-house several years ago and comes already battle-tested in the market. Finally, experienced talent is available as a number global banks reshuffle their businesses. Elsewhere but related, ever more sophisticated prime of primes are poised to onboard institutional clients that the tier one prime brokers no longer wish to service.

4.      Last look

As more and more market data products offer real-time (or very close to real-time) feeds, the case for last look as a tool for market data equalisation protection erodes – certainly in G10 currencies. The second stage of the Code of Conduct will be released in 2017 and this, too, should harmonise key players’ approaches. Keep fingers crossed for standardised metrics and analytics that permit like-for-like comparisons – such as Cost of Rejects – to be provided by major ECN and multidealer platforms and for responsible market makers to provide clear disclosures on how they operate last look i.e. whether they are active within the last look window and on rejected orders (ideally: no and no).

5.      MIFID II : the Great Unbundling

As the world prepares for the implementation of this wide-ranging legislation in early 2018, expect to see changes working through the marketplace. Spot FX is of course not technically in scope; however institutions and venues that offer multiple products (the majority of which are in scope) are likely to take a belt and braces approach. Expect more transparency and a greater unbundling of services : especially where dealing and research currently intertwine. Already we are starting to see a ‘platform’ approach whereby trading venues partner with independent algorithm and TCA providers in order to offer their clients an open choice. As we’ve seen in the consumer world (Facebook, Amazon, App Store etc.) early adopters whose platforms reach critical mass are difficult to catch up with and enjoy great forward multiples.

The views expressed on this blog are the author’s personal views and should not be attributed to any other person, including that of their employer.