Ankur Pruthi is one of the most influential traders in the FX world and one of the most experienced. He joined NBIM almost a decade ago to build up the forex trading business of the company, which was founded about seven years ago and where he maintains a trading ledger – for one of the largest wealth managers in the world. All foreign exchange flows through Pruthi’s book for NBIM, and he prices all internal customers and then offloads that risk. Pruthi sits in the Fixed Income department and reports to Malin Norberg, Global Head of Fixed Income Trading. Pruthi has dealers in Singapore, London, Oslo and New York. It’s a big team and a big job.
Long term strategy
“We exchange the residual risk here,” he explains. “We are not involved in managing the fund’s investments, so we have a slightly different focus and time horizon. We manage the FX execution risk, we don’t make five-year decisions, we just try to pass on the risk profitably.”
However, given the recent rate hikes, inflation, energy price shock and other unfavorable market conditions, the past year has been interesting to say the least.
“We’ve had very low volatility since about 2010, so we have a very successful trading strategy where we’ve been extremely patient and passive. There was no reason for us to jump on any prices, we could just wait, let the market come to us and keep our execution costs down. It was a profitable strategy, but of course things can change. There is of course a risk that your strategy may not always be appropriate – we are not dogmatic, we will not sit patiently waiting to buy US dollars while the market outperforms us.
“Our strategy is still working well in developed markets, but in emerging markets we are pivoting slightly to build capability and see how we might be able to offload risk a little differently than in the past. At DM we can be incredibly patient and passive and let the market come to us. It’s not that easy in the EM anymore and we see some challenges there.
“We have also relied on our liquidity providers for risk pricing, perhaps a little more than in the past – they are much better equipped than we are to offload risk when markets are fast. We try to be fair with them in terms of clip size, spacing etc, and in return we rely on them to offer tight pricing so we can get out when we need to.
“Spreads are definitely a bit wider right now, which is natural when volatility is higher. In the current regime, we have to be very careful when assessing an LP’s liquidity and risk storage capabilities – if the market isn’t moving, anyone can make a tight price of $100, but if it moves 50 basis points in two minutes, is a very different ball game.
global code
These challenges notwithstanding, Pruthi remains firmly focused on how to grow, develop and protect the FX market – and to that end has been heavily involved in the development and publication of the FX Global Code, a principles-based industry guide developed after a series of heavy fines for misconduct in the mid-2010s.
“FX is a difficult market to regulate as there is no regulatory body as such,” explains Pruthi.
Back in 2015, the BIS Markets Committee created a group of senior market participants called the Market Practitioner’s Group (MPG), led by former Deputy Governor of the Reserve Bank of Australia Guy Debelle, tasked with establishing best practices for the forex trading community. The group decided to develop a principles-based code as principles are difficult to reconcile.
“You can have as many rules as you want and people will always find ways around them,” Pruthi pointed out. “But a principles-based code that covers as much ground as possible is much harder to circumvent. We spent probably three years figuring out what those principles should be – with an initial focus on the ground highlighted by regulatory flaws.”
The 2017 version of the Code comprised 55 principles, with NBIM being the first buy-side signatory. Ownership of the code has now been transferred to the Global Foreign Exchange Committee (GFXC), made up of 18 central banks from around the world, with each bank bringing in a private sector representative. Pruthi is now a GFXC member representing the ECB’s private sector and as such has played a key role in the development of the latest version of the Code, which came out in 2021.
“The first version of the code was received fairly well, but there were still some questions on specific topics. The idea was that the code should become a living document, so in 2019 we started working on the new version and added some of the things that the market was asking for, like: Transaction Cost Analysis (TCA) and so on.
“The 2021 version has also significantly strengthened its forecast on last look hold times [a practice whereby a participant receiving a trade request has a final opportunity to accept or reject the request against its quoted price], and as a result, most liquidity providers have eliminated hold times entirely. This was the biggest discussion in the forex market in the last five years and the updated guidance should make the whole market fairer.
“If you read through the code and the LP disclosures, you will see that there is a spectrum there. But disclosure information is now all available in one central repository, all you have to do is click to understand how your flow is being handled. From a transparency perspective, that’s huge.”
Progress has also been made in the area of algo disclosures and TCA templates – not all of which may be widely used yet, but many LPs have already. And there are now also trading venues that curate liquidity pools with code-compliant liquidity – meaning that every participant in the pool has signed the code – a big step forward.
“All in all, solid progress has been made in recent years,” says Pruthi.
looking ahead
So what needs to be improved for the next round of updates?
“The idea is to keep up with the markets. But the bar for code changes shouldn’t be set too low. Any split or addition to the Code creates a tremendous amount of work for all signatories – my own trading compliance team spent the better part of six months before we could realistically endorse the Code. We should not take this lightly.”
That being said, GFXC will be conducting a survey of market participants in Q3, and this will likely be used to determine if there are any immediate gaps that need to be filled. For now, the survey is designed to focus on the impact of the July 2021 revision and reflect on the impact of those changes. But there is still work to be done.
“I think there is less awareness of algo disclosures and templates in general and that needs to change. If we could get to a place where all counterparties have a standardized disclosure, it would make it much easier for a buy-side participant to make comparisons.
“We also want a robust, fair and openly transparent foreign exchange market, and that can only happen when data access is democratic. Right now there is data-having and data-having-nothing and that is something that GFXC leadership is actively considering at this time.”
So how should FX bosses prepare their desks for change?
“You know, it’s more about making your traders aware of any changes made, making sure they have access to all disclosures and that they understand the implications of their execution decisions. The Code provides a framework for evaluating these execution options and helping you know what to expect from your counterparties and liquidity providers.”
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