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PSD2 – Fall update and new developments
| 28-11-2017 | François de Witte |
LIST OF ABBREVIATIONS USED IN THIS ARTICLE
Main updates on the regulatory framework
Some member states have already advised that they expect delays in the transposition of PSD2 in the national law, e.g. Belgium (by March 2018), the Netherland (by June 2018), Sweden, Poland, Spain and France.
Following countries already announced that they will be on track, e.g. Italy, Finland, Ireland, Czech Republic, Germany and Bulgaria.
By end November the EBA should publish the revised draft on the SCA (Strong Customer Authentication) and Secure Communication. We expect that a number of points, raised by the market participants, will be incorporated in the text.
With regard to the access to TPPs, article 113.4 of PSD2 explicitly states that the member states shall ensure the application of the security measures within18 months following the entry in force of the law. Hence, we might expect that this part of PSD2 needs only to be implemented by Q3 2019. However, in some countries, the authorities are pushing for an earlier implementation (e.g. in Belgium by end Q1 2018). Given the strategic importance and the IT act, I recommend starting this quite soon.
Main developments
Banks will have to implement interfaces, so they can interact with the AISPs and PISPs. This compliance with PSD2 is mandatory and all banks will have to make changes to their infrastructure deployments.
The challenge is to create standards for the APIs specifying the nomenclature, access protocols, authentication, etc.”. Banks will have to think about how their new API layers interact with their core banking systems and the data models that are implemented alongside this.
A number of working groups were constituted to further elaborate on these standards, the most important ones being the UK’s Open Banking Working Group (OBWG), the Berlin Group, and STET. Experts seem to agree that the Berlin Group Standard is the most elaborate one., as it incorporates the most relevant use cases and has been built with the latest technology standards using REST, OAuth2, JSON and HTTP-signature. It relies on ISO 20022 elements for structuring the data to be exchanged between TPPs and ASPSPs
As Marc Lainez, CEO of Ibanity, part of Isabel Group (developing API and PSD2 solutions for the XS2A and beyond) pointed out: “We can already see a fragmentation on the market. Several groups publishing specifications that are on many points different. With the RTS still being a moving target at the moment, those specifications are also incomplete as some details still need to be clarified. Some banks also choose to implement their own specifications without following closely any of those already published. In engineering, a standard is usually something that emerges through the best practices of an industry, it is not something that can be thought off entirely before it is actually used. At Ibanity, we are convinced that fragmentation will be a reality and several formats and specifications will co-exist on the market for some time. Looking at them from a pure software engineering point of view, we can say that those that seem the closest to what TPPs are actually expecting in terms of API quality are the specifications from the Open Banking Working Group and the Berlin Group. They still need, of course, to be challenged by the market with real use cases.“
The large banks have already started working on being PSD2 compliant and on building for the opening of their banking architecture to the TPPs. However, several small or medium sized banks only started recently on this project.
PSD2 has numerous interdependencies with other regulations (such as GDPR and eIDAS Regulation), promising a complex implementation with multiple stakeholders. For many banks, compliance by 2018 will be a challenge. Moreover there is a strong technology impact, adding to the complexity of the project. The following graphs of a market survey of PWC are a good illustration of the current state of the project with the European banks:
Conclusion
The PSD2 creates challenges. Several topics need to be clarified such as the RTS and the market players need also to agree on common standards for the interfaces. Moreover there are some unclarities in the text.
However, there are solutions in the market to withdraw the hassle for Banks and TPPs. The clock is ticking in the PSD race. Consequently, there is no justifiable reason for any bank to delay starting these projects.
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How does a FX Forward transaction work?
| 27-11-2017 | treasuryXL |
FX Forward Contract
A Foreign Exchange Swap (also known as a FX Forward) is a two-legged transaction where one currency is sold or bought against another currency at a determined date, and then simultaneously bought or sold back against the other currency at a future date. Normally this means the first transaction would take place at the prevailing spot rate and settle on the spot date, whilst the forward transaction would prevail at an agreed forward rate and settle on the agreed forward date. The difference between the Spot price (or first price) and the Forward price (or second price) represents the FX Forward and is expressed as Swap points.
What are Swap points?
Swap points represent the cost of borrowing one currency, whilst simultaneously lending another currency for a time period equal to the swap period. Swap points are therefore the cost of carry netted out between two currencies and used to adjust the existing Spot price to express the Forward price.
Worked example
Currency 1 ABC
Currency 2 XYZ
Period 6 months
Days in period 183
Interest rate 6 months ABC 4%
Interest rate 6 months XYZ 7%
Spot ABC/XYZ 2.1025
For ABC 1,000,000.00 there are XYZ 2,102,500.00
ABC 1,000,000.00 * (1+4/100*183/360) = ABC 1,020,000.00
XYZ 2,102,500.00 * (1+7/100*183/360) = XYZ 2,177,313.96
XYZ 2,177,313.96/ABC 1,020,333.33 = 2.1339
Swap points = +/+ 314 pips
What does this mean?
The Forward price of 2.1339 is higher than the Spot price of 2.1025 and means that the currency ABC trades at a forward premium to currency XYZ. Therefore, the Swap points of 314 pips are added to the current Spot price. A bank that is quoting would only quote the Swap points. A two-way quote would look something like 304/324. At 304 the bank would sell and buy ABC – spot against 6 months – against buying and selling XYZ. At 324 they would do the complete reverse.
So is the Forward price the same as a future?
No, the Forward price is not an attempt to determine the future value of currency ABC expressed in the price of currency XYZ. It is a price that is derived by notionally hedging the notional values of both currencies against their respective interest rates that are applicable at that moment in time. The Forward price is an example of interest rate parity – a state of non-arbitrage or equilibrium where traders are indifferent to either as there is no monetary advantage in either. Forwards are traded ‘Over the Counter’ and not via an exchange. Regardless of what the future value of spot ABC/XYZ is, once the trade has been executed there can only ever be opportunity loss or profit in the bookkeeping.
Variations
FX Forwards can also be forward starting – a client might wish to create/hedge an exposure starting in 4 months’ time and with a tenor of 6 months. This would be seen as a 6 month starting in 4 months’ time – or a 4m*10m. Such a Forward would be calculated from the present spot to both 4 months and 10 months, with the present Spot rate adjusted for the Forward price for 4 months to reflect the new starting price.
Alternatively, instead of swapping a position, a client might just wish to hedge their exposure/obligation in the future by trading ‘Outright’. If they were to buy ABC forward they would enter into a FX Swap (sell ABC at spot and buy forward) and then immediately buy ABC at spot, offsetting the spot leg of the FX Swap.
What moves the price?
Changes in the underlying interest rates of both currencies will affect the calculation. Also as the interest rate differential of the two currencies is expressed as a price of the existing spot rate, changes in the spot rate will also cause changes in the outcome of the calculation – though generally smaller than those caused by changes in interest rates.
Why trade FX Forwards?
FX Forwards allow a company to hedge future exposure/obligations. Once the contract has been struck that value is confirmed and is not subject to ‘mark-to-market’ variation orders as happens with an off-balance-sheet instrument. An exposure in one currency can be transformed into another currency via use of a FX Forward. An expected inflow or outflow that is delayed can be rolled forward by using a FX Forward.
Lionel Pavey
Cash Management and Treasury Specialist
The treasurer plays with fire, when hedging foreign currencies to his sole gut feelings
| 24-11-2017 | Rob Beemster |
The foreign exchange market is a highly volatile market and therefore full of surprises. For more than 20 years, I was a spot currency trader in the dealing room of a large international bank. One of the things I liked the most in being a trader was the unpredictability of the markets. Never a dull moment. The management of the bank gave us a lot of freedom, once you had proven the ability to handle this. But always we had to take care of some very important requirements, like the VAR (Value At Risk), and we had to protect our positions with stop-loss orders.
Executing a stop-loss was the worst part of my job. It proved that you had been wrong in judging a certain move of a currency. It sometimes felt like being a loser. However, executing at a stop-loss level gives you the freedom to restart a new currency position. We were never blamed by colleagues or the management for having executed a stop-loss. It was part of the risks, and by using a stop everyone knew that overall business would never be hurt. If losses taken by stops were in line with the profits taken (relatively speaking) everything would be fine, considering that a good trader makes more positive decisions then negative ones.
Now let’s consider the controller who decides on his hedges, based on his gut feelings. Most probably this is based on old nonsensical ideas like, “what goes up must go down”, and, “It will come back to old levels”. Because of my business today, I speak with finance managers about their hedging strategies. Sometimes they make me feel embarrassed because of their self-created strategies; “I like to play foreign currency strategy myself”, or; “we have had good years and less good years”. From a business economic point of view this can be very painful. Volatility in foreign currencies is a very important component of international business. But one has to realize that this component can be managed. Companies should install a risk management procedure on their foreign currency exposure/obligations, to preserve their profit margins. A proper strategy not only protects the margins and cash flow but will also create prudency within the entire company.
A currency strategy is an implemented structure, necessary for the finance department. However, others that are responsible for the flows, like sales departments, procurement or production, should be involved and be aware of the importance of the strategy as well. Our models do describe the tasks of all the departments. A communication plan is part of the currency strategy. When the implemented processes are understood by everyone within the company, then and only then the strategy will work.
Our foreign currency risk models are very useful within international operating corporations. We can help you to implement the processes that will secure cash flows. A controller, who makes decisions on FX out of the blue, is unacceptable and too dangerous for the continuity of the business, moreover, it is intolerable in modern finance departments.
Barcelona valuta experts can be of assistance to you. After precise research of the current status of your company we can implement the right models. And this will protect you against negative or unwelcome currency moves.
Rob Beemster
Owner of Barcelona valuta experts BV