FX markets are unique not only in their scale but also in their complexity. There are multiple trading paradigms, and also multiple venues where trades may be executed. The FX ecosystem is highly fragmented and the case for more automation has been clear for some time.
Steve French, Head of Product Strategy, Head of Product for Traiana
And yet, automation hasn’t happened yet. Why not, and when will it happen? Steve French, Head of Product for Traiana, writes about the challenges to automation, its benefits, and the key steps that firms should take on their journey towards implementing automation. Inefficiency is an ever-present risk factor in FX trading and post-trade processing. This should be surprising, but it isn’t.
FX markets are complex eco-systems in which the complexities arise from three main areas: first, there are the challenges associated with the need to support post-trade processing across the whole of the fragmented eco-system; secondly, there is the established practice of using multiple vendors and/or internal systems to support individual areas of the wider FX market; and finally, there is the related established practice of using multiple vendors and/or internal systems to support discrete aspects of the overall FX trade lifecycle.
Challenges Facing the Back Office
All this adds up to a diverse matrix of processes and procedures that have evolved to handle, bluntly, anything that the FX market can throw at it. To cite just a few examples that illustrate the challenges facing the back office, some clients still book trades manually, and resort to fax and/or email confirmation.
Some clients have no agreed protocol or method for responding to significant events – which is problematic for derivatives if not so much for cash markets. In cash, some bilateral trades are still being settled manually. There is widespread automation in FX, of course, but it falls significantly short of being universal.
The maxim «if it ain’t broke, don’t fix it» applies as well here as it did to stagecoach technology at around the time the first Model T Ford rolled off the production line. What’s to be done?
Putting the Money Up Front
«Historically, investment has been focused on front-office activities. Since the financial crisis, regulatory conformance has taken a huge slice of IT budgets,» says French. Back-office and supporting post-trade services have only received a small percentage of the IT spend.
But the benefits of automation are increasingly being acknowledged: lower operational risks and avoidance of settlement failures; lower support and operational costs. Automated matching, confirmation and affirmation processes with a greater number of counterparties will also lower costs for intermediaries and execution providers and will provide a more streamlined flow of trades into settlement and clearing services
How, Then, Do We Move Forward?
First point: regulation facilitates automation. French says: «There’s an indirect impact of regulation whereby the costs associated with maintaining bi-lateral agreements with counterparties – and having to post VM for some FX instruments under UMR – are pushing more firms towards clearing, which will force standardized processes to emerge. We’re seeing an expansion of the number of FX instruments supported by central counterparties as well as the introduction of listed FX instruments, which some are using as alternatives to pure OTC FX market trading.»
CME Group’s Traiana operates the leading market infrastructure for post-trade processing and risk management across asset classes and provides client service and risk management technology across the financial sector. Global banks, broker/dealers, buy-side firms and trading platforms use our cross-asset class services to automate risk management and pre-trade/post-trade processing of listed and over-the-counter transactions. Traiana’s network is comprised of the global financial community’s leading voices – providing insight, thought leadership and connectivity.
