SWIFT support for the FX Market – Meet the margin challenge in the back office
FX market participants face the challenge of declining profitability as clients squeeze margins and the FX Global Code increases compliance costs, but help is available from an unexpected quarter – namely, back office data and services.
According to the triennial survey by the Bank for International Settlements (BIS), the average value of foreign exchange trades completed every day has increased at a compound annual rate of 7 per cent a year since 1998 to reach $5.1 trillion in 2016. Unfortunately, the BIS data does not count the actual number of transactions that lie behind these enormous figures. However, a reasonable estimate is that FX counterparties are exchanging somewhere between 1.3 and 1.4 billion FX trade confirmations each year.
FX confirmations are data, and data contains information. Information contains insights that can help banks enhance the competitiveness of their services. FX confirmation data can also indicate where liquidity can be found, increasing activity and tightening prices. Operationally, it allows users to gauge the scale of the challenge in automating message flows, across FX forwards and swaps as well as spot market trades. The value of this data to strategic decision-making, and in cutting costs, is obvious. But it has not been available, until now.
The FX market is highly fragmented and, despite the interpolation of a centralized risk reduction service for 18 currencies in the shape of CLS, transactions remain largely bi-lateral. Transactional data is scattered across correspondent banks, execution platforms and CLS, and hard to aggregate. But what is common to a clear majority of FX transactions is this: the counterparties swap confirmation messages over SWIFT, either directly or via CLS, every day. In fact, as many as one in three of the payment messages carried on SWIFT originated in an FX transaction. It is safe to say that banks use SWIFT for all of their FX message traffic via CLS and for a large proportion of their bi-lateral trades.
This has enabled SWIFT to aggregate information about a large number of spot, forward and swap transactions in the FX market. In total, SWIFT is probably carrying about 1 billion messages a year. The aggregation and analysis of the data these messages contain creates a valuable source of information for the thousands of banks competing in the FX markets. It is also derived from actual transactional activity, not a survey of market participants, and it is refreshed and updated every day by further transactions. But until recently it was not accessible.
Following approval by its Board – whose membership includes some large users of these message types – SWIFT last year launched a monthly FX data service that enables users to benchmark their FX business against any anonymized group of competitors they choose, by currency pair and instrument type. For FX market participants looking to maintain profitability, both by identifying fresh high margin opportunities and by cutting costs through automation and strategic withdrawals from less attractive segments of the market, this data is an invaluable aid to decision-making.
The SWIFT FX market data can also help market participants comply with the FX Global Code, the list of best practices published by the Bank for International Settlements in May 2017, more quickly and at lower cost. The Global Code commits all its signatories to the maintenance of a transparent FX market, as well as one which is open and fair, and accurate data is essential to transparency. But transparency is just one aspect of the Code. It contains a total of 55 principles, each of which lays further obligations on signatories, including making more strenuous efforts to net FX transactions and settle them promptly payment-versus-payment.
This is natural territory for SWIFT. After studying the Code in detail, SWIFT has concluded it can help its users implement 14 of the 55 principles without incurring any costs additional to their existing SWIFT membership. To take just four examples, SWIFT can automate links between front and back offices (Principle 44), SWIFT messages can incorporate standing settlement instructions (SSIs) automatically (Principle 51), the SWIFT KYC Registry can speed up Know Your Client (KYC) checks (Principle 37) and the SWIFT liquidity reporting service (SWIFT Scope) can help participants project and meet their daily funding requirements (Principle 53). These in-the-price cost savings can make a significant contribution to the maintenance of the profitability of FX market participants.
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