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Delivering post-trade efficiencies in a fragmented FX market

Vincenzo Dimase
Vincenzo Dimase
Sales Readiness Director – Trading

FX market fragmentation and a growing choice of liquidity pools has resulted in complexity in post-trade workflow. How can firms simplify the post-trade process and improve operational efficiencies?

  1. Fragmentation in post-trade workflows has led to cost inefficiencies and increased operational risk.
  2. Regulation and the FX Global Code have established requirements for robust supervision and data management practices in post-trade operations.
  3. The adoption of common standards and the outsourcing of post-trade processes will enable firms to simplify their operations and mitigate risk.

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Over recent years the FX market has seen increased fragmentation of liquidity, with no sign of this trend abating.

Post-trade complexity

Due in part to the rise of FX aggregators, traders have a wider choice than ever of liquidity providers and execution methods. FX transactions can be made using a variety of methods including Central Limit Orders Books like Refinitiv Matching, single bank portals, electronic trading platforms such as Refinitiv FXall and telephone dealing.

This has brought efficiency to the execution process, but at the same time has led to increased post-trade complexity, with the back office needing to manage many different messaging protocols and APIs.

With banks connecting to new trading platforms, and regional expansion adding to the problem, fragmentation shows no signs of slowing. Market electronification notwithstanding, a high level of manual intervention is still required at multiple stages during the post-trade process, which can lead to human error and increased operational risk.

Refinitiv Deal Tracker offers a suite of tools for monitoring and processing every FX trade on all major foreign exchange platforms around the world, from the front to the back office

The regulators are watching

With regulators focused on transparency, market participants are subject to a higher level of scrutiny than ever before.

As trading businesses span multiple territories, it is essential that they comply with the regulations across all jurisdictions. Of particular importance are accurate and centralised record-keeping, audit trails and the ability for compliance teams to respond quickly and efficiently to any investigation.

A typical requirement is for firms to respond to regulators within a few days, meaning that gathering disparate files from around the world or consolidating information scattered across various channels is no longer fit for purpose.

Similarly, the FX Global Code, contains a number of principles relating to risk management and post-trade activities, particularly in relation to data management and supervision. These guidelines supplement local regulations, and firms that have committed to adhere to the code recognise that they need to invest in technology to ensure that their business activities are conducted in accordance with its principles.

Simplification is the key

Investment in front-office systems and automated trading solutions has historically taken priority over the needs of the middle- and back-office. Changing post-trade infrastructure is viewed as a complicated, costly and often unnecessary process.

However, the benefits of migrating from several legacy systems are considerable. Banks and buy-side firms are now looking at using external post-trade systems and processes to simplify their operations, increase efficiency, reduce costs and to lower risk by minimising single points of failure.

Standardisation is an increasingly important factor in post-trade processing. FIX protocol, originally developed for equities, is being adopted as a standard for the FX market, allowing a degree of future-proofing because it is constantly being developed to support changing businesses and evolving regulatory needs.

Distributed ledger technology (DLT) has not yet reached a tipping point in terms of market adoption, but there is growing interest in its use in the areas of collateral management and FX settlement.

Currently, it is important for firms to simplify and tighten existing post-trade processes, to prepare for next-generation systems. Market participants are moving away from fragmented post-trade workflows as they recognise the advantages of automation in post-trade activities.

Hosted solutions for increased efficiency and resilience

Moving to a fully-hosted solution such as Refinitiv Deal Tracker, a suite of tools for monitoring and processing trades on all major FX platforms globally, is a cost-effective way to enhance post-trade operations.

Deal Tracker includes trade notifications from Refinitiv Conversational Dealing, Refinitiv FX Matching, brokers, other trading venues and bank portals, capturing data across FX liquidity venues.

By using fully-hosted technology, Refinitiv manages data and infrastructure issues, which enables trading firms to concentrate on their core businesses. By employing a fully-hosted environment, support costs are reduced, while new and innovative technologies can be implemented without incurring a significant spend.

Refinitiv Deal Tracker offers a suite of tools for monitoring and processing every FX trade on all major foreign exchange platforms around the world, from the front to the back office