FX Trading Q&A: James Kemp, Managing Director of Global Financial Markets Association’s Global FX Division (GFXD)
London-based James Kemp leads the Global FX Division (GFXD) of the Global Financial Markets Association (GFMA), which works to ensure a well-functioning, efficient, and cost-effective global FX market, among its key objectives. Now in his 14th year at the helm of the industry association, Kemp speaks with Markets Media Group Senior Writer Julie Ros about the ongoing efforts to keep abreast of industry best practices.
You started your career as a consultant, what led you to GFMA?
I started out doing M&A and corporate strategy consulting work both in London and then in the US. After that period, I spent nearly five years at Reuters, where I headed up their equity and fixed income business in the UK. After Reuters, I founded a financial technology consulting company with a colleague and got quite heavily involved in building trading systems for banks. That business was acquired by Ion Trading in 2009.
At that point, we’d just been through the global financial crisis, and there had been a number of key decisions that were impacting the FX market. The FX banks were looking for somebody to help them found and take the lead on advocacy for the FX market, and that’s how I ended up leading the Global FX Division of the GFMA.
How does the GFXD fit into GFMA and its affiliates?
Following the financial crisis and the G20 meeting in Pittsburgh that focused on topics around clearing, execution, and reporting, there were a number of regulatory market structure conversations going on – Volcker, Dodd-Frank, MiFID to name a few.
Given the environment at the time, the three sister trade associations were being strengthened to cover the three main time zones; AFME to look at markets in Europe, SIFMA in the US, and ASIFMA in the Asia Pacific region, and then using the GFMA brand when working together on global topics. But nobody was focused on the FX industry in relation to the new legislative agenda, largely because FX had traditionally fallen under the central bank-affiliated FX committees.
So, in 2010 we created a new trade body that covered FX, and because many of the members were going to be similar and time to market was critical, we decided to set up the GFXD in cooperation with the GFMA entities, leveraging the broad footprint of AFME, SIFMA and ASIFMA.
The GFXD now has 24 members representing the majority of the global FX inter-dealer market, and uniquely covers the FX cash and derivatives markets from front-to-back office, globally. Our approach is to work with our bank membership to help them understand market regulations and advocate as required. We also then support members with operational implementation of best practices, as well as focus on activities and conduct issues in line with the FX Global Code. Regulations have made the world more networked in terms of financial markets, so trying to produce guidance that reduces risk, improves standardization, and increases efficiency is an important part of what we do.
Can you give me some color into the FX market of the last decade and what sparked the initiative behind the FX Global Code?
In its initial phase, post the financial crisis, the Global FX Division focused on the regulatory agenda – so execution, reporting, clearing, and prudential issues – but identified that each region was coming at it slightly differently. The FX market is one of the few truly global markets, so we needed to ensure that from a regulatory point of view, the regulators were looking at our market on a global basis. Our aim was to ensure a level of harmonization and standardization across the G20, which meant a lot of our work was spent explaining the FX market, the structure, and how it operates.
What were some of the core areas of focus?
If you’ll recall, there were heated discussions back then around whether FX forwards and swaps should be included in clearing mandates under Dodd-Frank. That decision would have had material knock-on effects as to FX market structure – for example, what the execution platforms and CCP landscape would look like for FX both in the US and Europe/UK – and we were very involved with those conversations, with the US Treasury final decision that they should be excluded. That phase finished round 2013, which is when some of the well-publicized issues around conduct surfaced and it became clear that the industry needed to address these challenges.
At that time, I was asked to Chair the FX Committee under the Fair and Effective Markets Review (FEMR) in the UK. The question we had to address was what the best way would be to move forward given the breadth and depth of the FX market – which consists of a wide range of global participants, such as corporates, real money, hedge funds, principal trading firms, banks, central banks, etc. We needed to find a way that would encapsulate the best behavioral characteristics of the market as a whole.
The core proposal I put forward under FEMR was to create a “Global Code” of principles, bringing together existing best practices guidelines into a global code of conduct for FX and producing a proof of concept to demonstrate how it could be done. I’m pleased to say that the proposal was adopted by the BIS and from there, through a private-public partnership under what is now the Global Foreign Exchange Committee (GFXC), the FX Global Code was created and released in 2017. The GFXC is comprised of central bank-sponsored FX committees representing 20 members and associate members and promotes, maintains and updates the Code. At the last count, over 1,290 global entities are now signed up to the Code, something I’m very proud of.
What were some of the major outcomes of the FX Global Code work?
It was an important moment for the industry to acknowledge the global nature of the market, the need for the industry to work together and enhance conduct in terms of how things are done – and be quite explicit about how the interactions between different market participants should be conducted.
The one thing that has changed enormously – and continues to evolve – is the way in which different participants interact. Market complexities have increased in terms of the trading platforms, the emergence of hedge fund/principal trading firms, and the interplay between liquidity providers and liquidity consumers. Understanding these relationships and the ways in which people interact has become increasingly important. The FX Global Code has come a long way in addressing those relationships and how people should behave within them.
What are some of the key agenda items for GFXD in 2024?
Since the G20 changes and the release of the Code, we have spent the past six years focusing on market functioning and implementing regulation. And of course, ever dynamic, the market has continued to evolve and so has the GFXD. So, more recently, we’ve been looking at how firms can be more efficient in the areas of settlement and netting, and what issues members should contemplate from a capital perspective. For example, what does FRTB [Fundamental Review of the Trading Book] mean for FX? What is the impact of SA-CCR on the FX market?
With regards to FRTB, we’ve done work looking at how it is implemented in the FX market. For SA-CCR, we’ve done projects around optimization between clearing, compression, and other methods of reducing risk.
Other areas we have focused on include prime brokerage – how do you monitor and reduce credit allocations in FX markets? What does prime brokerage look like from a market functioning perspective?
Another area that we’ve grown into as well is in emerging markets currencies and some of the challenges that exist within EM. There is a broad array of different legal agreements, infrastructures, trading rules, etc, that underpin those markets. As we’ve seen these markets grow, we try to ensure that we identify any areas of risk or areas where you could improve such as basis risk between cleared and uncleared markets or understanding the underpinning EMTA or ISDA agreements. Then there are geopolitical events, such as the Russian invasion of Ukraine, which clearly caused challenges within the ruble market, for example. You have to contemplate what this may mean from a deliverable currency point of view when there is a disruption event.
Then there’s the challenges arising from the SEC T+1 securities settlement changes – what do we need to look at in the FX ecosystem that will be impacted by this change? We’ve spent a fair amount of time looking at the potential FX impact of T+1 securities settlement and making sure it is well understood by market participants. That focus will continue through to the go-live in May and of course other markets such as the UK and EU are also considering a move. We’re keen to understand where securities markets are going in terms moving to something even faster than T+1 because for FX, that is a critical discussion given that FX often is the funding mechanism for many of these transactions. Understanding settlement risk and keeping pressure on the reduction of settlement risk in the FX industry clearly links with the T+1 agenda. So, we need to make sure that people are aware that if they’re contemplating an accelerated settlement discussion, they understand the building blocks and impact.
We also have to think about the future – how does the market evolve going forward? You’ve got this dynamic, growing and diverse set of market participants, the way in which liquidity moves, and an existing set of technologies that underpin it. How will they work in the future?
Then there’s the technical evolution – Central Bank Digital Currencies, Stablecoins, DLT – what does that mean for the FX market when you start to think about new payment rails and experiments around tokenization? If you have tokenized money, how do you deliver cross-border tokenized money? What does that look like from an FX market perspective going forward? And of course, what are the impacts of AI within financial markets and specifically within FX across a range of areas – from trading through to middle through to back office. Those sorts of new areas in market evolution will remain high on our agenda going forward.
So, in 2024, we will spend time on the regulatory agenda, the Global Code implementation agenda, the efficiency agenda, as well as the future market agenda.
