Cobalt FX to Launch Trade Notification Network

The Full FX understands that Cobalt FX is nearing launch of a Trade Notification Network (TNN) that connects all bilateral, three-way and four-way trade parties – a service it will provide for free.

Sources familiar with the matter say that the firm has a number of banks in live testing mode, with a pipeline of other institutions being processed. They add the move has been made to address concerns in the FX industry over cyber-security in the wake of the ION hack in the derivatives industry earlier this year, as well as over the lack of competition in messaging services. Currently, the space is dominated by Osttra, with its Harmony, TradeStep and DealHub services.

The move will see the United Fintech-owned Cobalt FX go head-to-head with Osttra, however banking sources spoken to believe it to be a good move, not least because it offers relief from what is seen as a Single Point of Failure (SPoF) risk. “We saw how bad things could get during the ION hack, where we were manual processing for days and took weeks, literally, to pull all our records together and check them,” observes a senior operations executive at a bank in Europe. “We are much bigger in FX, if the same happened there it doesn’t bear thinking about how much damage could be caused.

“If we can switch over to another network, the industry has redundancy – we have it in trading, and it’s about time we had it in the post-trade processing space,” they continue. “As banks we can do a lot of minimise cyber security risks, but when a majority of trades pass through a single, external, third-party, business, there is little or nothing we can do. This is why competition is good – we need a Plan B.”

The issue also appears to be getting some attention in trading circles. A delegate at FIA Expo in Chicago last week told The Full FX, “We make most of our money through trading, and during the extended period of the ION hack our derivatives activity was about 10% of normal – you can imagine what that has done to revenues. If anyone in FX thinks this isn’t an issue, because it’s a decentralised market, they need to think again – there are always vulnerabilities, as we discovered to our cost.”

The sources familiar with the Cobalt FX initiative suggest that the firm is very much thinking of its TNN as a Plan B, and observe that it is likely to get traction because “the industry wants to get in front of the regulators”. It is also noteworthy, they point out, that the derivatives’ industry regulator in the US, the Commodity Futures Trading Commission (CFTC) was powerless to do anything and “sat on the sidelines watching events as we all did”.

With regulators keen to avoid a “bundling” of critical services under one roof in financial services, any move by Cobalt FX to introduce competition is likely to be welcomed by the FX industry. The fact that it will be free – “nobody pays for WhatsApp or email, why should they still pay for this?” observes one source – should help the firm gain traction (the understanding is they firm will charge for related services in its credit and post-trade modules).

For more on this, see this week’s The Last Look…