To reduce the costs of post-trade, the FX industry will either have to replace or evolve legacy technology. To do this, there needs to be a common strategy. At a recent SWIFT webinar moderated by Dominic Hobson, industry experts debated how the foreign exchange industry should respond to pressures to increase efficiency and reduce costs. This is the first article in a two part series detailing the ideas shared at the webinar.
The webinar participants were:
- Matt Cook, Senior Markets Manager, Capital Markets & FX, SWIFT
- Duncan Lord, Director, Core Operations Delivery Management, Barclays
- Adrian Patten, Co-founder and Chairman, Cobalt
- Mike Robertson, Global Head of Transactional FX Trading, Bank of America Merrill Lynch (BAML)
- Alex Walker, Head of Post-Trade FX, Refinitiv (FXall trading platform is part of Refinitiv)
The FX industry needs to reduce post-trade costs. The revenues and the margins of both the FX banks and their buy-side clients are being squeezed, but that same pressure makes it more difficult for them to invest in cost-saving measures.
Alex Walker, sees making post-trade processes simpler and more cost-efficient for buy-side firms as her principal focus, because more efficient post-trade processes help win business in their other pre-trade and trading activities. “Our buy-side clients are looking for netting, confirmations matching, SWIFT connectivity, interaction with CLS, the whole transaction lifecycle,” explained Walker. “So we invest in a service that is fully hosted and managed in our cloud and all our efforts are directed at minimising any obstacles for platform utilisation. Nobody in post-trade is interested in silos. We are platform agnostic. We believe bringing efficiencies to the collection and consolidation of post-trade data is the key to bringing efficiencies across all further downstream processes.”
Mike Robertson is exposed every day to corporate and buy-side clients wanting to reduce costs. “Our clients continue to press us,” he said. “Not necessarily directly but definitely indirectly. It comes down to how you would win business from a client if your underlying cost base continues to be 'legacy' in terms of costs. Naturally, if you are carrying a higher cost, that makes you uncompetitive.”
The value of netting
The value of netting to the banks, in reduced funding costs, is an obvious way to address post-trade costs. Bi-lateral netting is so valuable banks are prepared to incur the extra costs of awkward manual work-arounds. Yet neither the MT 370 bi-lateral netting message standard published by SWIFT in 2012 nor CLSNet, the blockchain-based bi-lateral netting service which CLS has opened to non-banks, has seen anything like the take-up by FX market participants that the additional benefits of automated netting dictate.
Duncan Lord explained: “Netting is the biggest single source of manual intervention. There is no standardisation. Everyone is doing the same thing, but in a different flavour within their own shop. There is no automated affirmation of net positions. You could just pay it, but I am not sure anyone would want to do that, because of the risk of erroneous settlement. We could have 100 per cent STP in that market but we do not.”
The obstacle to that 100 per cent STP, argued Adrian Patten, is the same as the cause: multifarious systems and processes. “Everybody has different ways of capturing and confirming trades, and feeds data into separate payments processes,” said Patten. “The trouble at the moment is that, for any given FX transaction, there are probably 15 different versions. We create instead a single shared version of the trade. Our aim is to create a one-time reconciliation for all FX trades.”
However, even when third party services seem to provide a means of breaking the deadlock, inertia seems to triumph over investment in new technologies. In fact by contributing to the fragmentation of post-trade processes and systems, and so even increasing post-trade costs, they also make it more difficult to build consensus on the need for change, or which solution to adopt across the sector.
What will determine how the industry moves forward?
The experts then discussed whether the willingness to change back office FX processes is more significant than whether the change happens through legacy, or new technologies. Mike Robertson, supported industry-wide consensus. “It is fine to have a new technology, but it is not fine if some of us do not want to change or some of us cannot change,” he said. “FX is at the point credit cards were many years ago. In order to promote a global interchange process in the cards industry you had to have relatively straightforward rules that everybody agreed to. That was fantastic once everybody agreed, but getting that agreement was very hard. I am sure SWIFT sees the same thing when they are trying to make their members change.”
Matt Cook pointed out that the SWIFT gpi service, which offers users a window into inbound and outbound payments, is an example of an operational improvement that does not require a big upfront investment in new technology. “It enables users to understand in real-time exactly when a payment hits your account and is available and, at the other end, when the funds are available to a beneficiary.” But equally important in Cook’s view is that, “the success of gpi in the correspondent banking industry shows that, where there is a common ambition to change, legacy technology is perfectly capable of supporting it.”
In other words, the obstacle to change is not the technology, but the need for agreement among market participants on a change to post-trade processes.
Evolution not revolution
However, Duncan Lord shared a different view: “You can have ten banks round the table, which is great, but that is not where the problem is. The problem is how you get the buy-side and the corporates on to those platforms, when they do not have the incentive to do it. We need to make it easy for clients. If it is not easy, they will not use it.”
Alex Walker was also wary of any instant solution. “I am more into evolution than revolution in the post-trade space,” Walker explained. “There are so many different components that to try and get one organisation to be the expert on everything does not really work. If you have inter-operability between the various components you can offer the client a menu they can work out together as their version of the post-trade infrastructure they want to implement. Components will come from us, but also from competitors and partners. It will not be one-size-fits-all, or the same for every participant, but it will give the optimum return on investment, level of automation and workflow for each particular organisation.”
For the latest insights and innovation from across the global FX industry, don’t miss the FX Day programme at Sibos 2019 on Monday 23 September 2019, London. Find out more about the programme and register on the Sibos website.