The use of fragmented systems for FX post-trade workflows elevates operational and regulatory risk, as well as technology spend. How can financial institutions overcome these challenges in order to trade smarter and faster?
- The use of fragmented systems for post-trade processing elevates operational risk and technology spend, thereby paving the way for much needed consolidation.
- FX Global Code has laid a strong emphasis on effective supervision, control and exception handling procedures to be put in place for trading and post-trade workflows.
- In an environment of limited technology budgets and cost reduction across the post-trade infrastructure, can you risk any compliance slip-ups post-MiFID II?
The foreign exchange (FX) market is the largest sector of the global financial system with an average daily volume of more than six trillion U.S. dollars. But just as the FX market has grown, so too has the diversity of participants and complexity of workflows.
To reflect today’s highly fragmented and increasingly scrutinized FX market, traders need platforms that offer optimal transparency, maintain access to liquidity, improve quality of execution and are supported by complete post-trade solutions.
FX post-trade challenges
Since the financial crisis, the number of regulations impacting the financial services industry has been on the rise.The need for transparency around best execution gave rise to aggregation platforms that certainly brought efficiency to the execution process but also added further complexity to post-trade workflows.
For any FX trading desk, it is unlikely for a single platform to meet all the functional and execution requirements across FX instruments.
Even if it does, FX being an OTC market, there are still situations where the trader may have to execute trades outside of their primary platform to find suitable liquidity through a voice broker, on a direct single dealer portal or in a chatroom.
To support this fragmented ecosystem, the institutions are forced to implement bespoke connections for receiving automated post-trade confirmations from each channel.
Managing such a complex interface matrix is an expensive affair that not only increases support overhead, but also leaves little to no bandwidth for the trading desks to try new innovative platforms without incurring a significant opportunity cost.
FX market expectations
Historically, investments have always prioritized front-office activities with little budget allocation to post-trade aspects.
However, the increased regulatory focus on FX since the global financial crisis has underscored the importance of straight through processing (STP) workflows, record keeping and reporting, audit trails and need for a common messaging protocol like FIX.
In this age of technology automation, it is reasonable for financial institutions (FIs) to demand a consolidated solution that can allow them to reach counterparties all around the world through a single STP connection, with guaranteed delivery and global customer support.
Irrespective of the venue, this routing should support trades from all single dealer, multi-dealer and voice broker platforms.
The solution should also have a full instrument coverage on the service including FX Spot, Swaps Forward Outrights, Options, NDFs, NDS, Currency Loans and Deposits.
Further, to be considered by all market participants, the solution should support widely used message formats (FIX, XML etc.) to ensure interface compatibility with a wide variety of middle and back office systems used by the financial institutions.
FX Global Code
The FX Global Code is a set of global principles detailing best practice in the foreign exchange market, developed to provide a common group of guidelines to promote the integrity and effective functioning of the wholesale foreign exchange market.
Post-trade elements covered under the Code, MiFID II and other important regulations include record keeping, data encryption, trade reconstruction, audit trails, technology and STP workflows, which must all meet a common standard across industries and organizations.
In a market where the majority of the trading happens electronically, the manual handling of trade capturing, reconciliation and other middle and back-office activities is still prevalent.
The FX Global Code insists on implementing a straight through process for data transmission that is instant, secure and efficient with proper time stamp, audit and exception handling capability.
Although the Code is a set of global best practice principles that supplement all local rules and regulations, some industry participants have already started using adherence to the code as one of the criteria for assessing their counterparties.
An adherence statement is not only a commitment but requires a deeper investment in adapting to the principles and ensuring that all business activities are conducted in accordance.
Streamlining post-trade workflows
Fierce competition and tightening profit margins are increasing pressure to drive down infrastructure and maintenance costs.
Given the support burden that is associated with the in-house legacy systems, outsourcing of middle and back-office technology is the most preferred option to increase automation, simplify architecture and reduce total cost of ownership (TCO).
The dependency on multiple applications to manage the trade downstream means additional point of failures.
The result is an increased supervision responsibility on middle office managers which is deemed to be an operational risk. What financial institutions need instead is an automated tool that can receive, monitor and process all FX trade executed by their global desks across trading channels.
In addition to the cost benefits, the solution should provide back-office operations staff with better ways of organizing incoming trades with an effective workflow for reviewing, validating and exception-handling.
It should be able to track net positions, archive data for easy searching, and support custom queries for management reporting or compliance needs.
Finally, the holistic surveillance of the trading data should be made easier and faster so that financial institutions can address audit queries in a timely manner.
Performing an active monitoring or investigating a case has never been more challenging for the compliance officers as communication related to trades could be scattered across various channels (such as Microsoft Teams, Eikon Messenger, Symphony, Outlook, WeChat, Skype for Business, LinkedIn, Twitter, etc.).
A consolidated view of all the trades and corresponding communication in a single archive is a must for effective monitoring and performing trade reconstruction to meet all investigatory demands.
Choosing the right technology partner
As regulations continue to emphasize technology automation in post-trade activities, we will see market participants moving away from a fragmented reconciliation workflow.
Centralized platforms for post-trade consolidation are bound to become a norm and vendors will play an important role in leading the market towards higher efficiency.
Therefore, choosing the right technology partner that not only addresses your immediate strategic priorities but also has a vision into the future is critical.
This partner should have a consultative approach, good understanding of regulations and a reputation of successfully delivering similar solutions to the industry.