GFXD Paper Addresses FX Trade Allocation “Inefficiencies”
Posted by Colin Lambert. Last updated: February 23, 2026
Following an analysis of the “future of FX” which identified a “persistent trend of increasing costs even within periodically volatile markets”, the Global FX Division, which represents leading banks in the industry, has published a new white paper looking at the trade allocation process, something the association says “can suffer from a number of inefficiencies” and increase risks.
In the paper, Optimising the FX Trade Allocation Process, GFXD cites its analysis indicating that since 2020, liquidity providers’ costs have risen by 17% across the workflow, driven by multi-jurisdictional regulatory costs, trading venue costs (which it pointedly notes are “almost entirely” borne by the LP), capital and technology costs, as well as those associated with operations and middle-office risk management functions. These pressures are challenging the long-term profitability of FX offerings, it states, thus forcing LPs to constantly re-evaluate what products to offer to what clients, and how to deliver them.
GFXD says its analysis highlighted “key challenge areas and rising costs” in the post-trade area, specifically in the trade allocation process (TAP), inefficiencies within which were “a major issue”, especially when executing block trades for asset manager clients. These trades, which often require a high number of allocations across the fund accounts can have variable costs, the paper notes, and are typically one-to-three-month FX swaps or forwards “executed at ultra-competitive pricing at no or low bid-offer spreads”.
GFXD seeks to link the issue to the “real economy” by observing that these trades often support equity and fixed income investment transactions, can be sizeable, and are often connected to pension plans. “By nature, any inefficiencies in the trade allocation process are therefore a shared challenge, requiring joint ownership and accountability for developing a more resilient solution to be owned by all market participants,” the GFXD paper argues. “Specifically, it is the practice of providing post-trade notification of allocations as a recurring market practice that is problematic; it lowers transparency and increases a series of risks across the entire FX trade lifecycle – including settlement, credit, capital, compliance, market, and operational risks.”
To help alleviate the pressure, the paper urges market participants (in the TAP case the buy side participants) to advise specific allocation details pre-trade, rather than push them to the middle- or back-office functions post-trade. In another of five key recommendations, the paper observes that automated pre-trade allocations processed via STP help to mitigate risks and align with Principles 35 and 50 in the FX Global Code for reducing settlement risk.
The remaining three recommendations are to establish a list of best practices for allocations that aligns with the Code, raise awareness in the industry of the cost of any inefficiencies, and the prioritisation of account opening/onboarding prior to trading to help minimise the chances of trade breaks. “Post-trade account set-up challenges are heightened by accelerating settlement cycles and can result in payment and settlement delays,” the paper states.
The paper offers examples of how current processes are inefficient, and what can be done to improve them – it also highlights likely changes in market structure brought about by developments such as stablecoins, tokenisation, CBDCs and accelerated settlement times in other markets.
The paper concludes by stressing that adoption of the recommendations will require “a collective change of behaviours from multiple stakeholders, which, until now, have often lacked incentives to change from the current status quo…[and] are shared challenges across the banks, sell-side and vendors and require engagement and ownership by all three FX market participants to remediate the trade allocation process”.
Reiterating what could be termed a smokescreen currently being laid by increased volatility, the paper states, “These challenges persist through all market conditions, and do not abate when pockets of volatility provide windows of increased volumes at better returns. Trading patterns are quickly reverting to the low volatility, tight range-traded.
“The increased pace of adoption of innovative technologies may be one response to the process inefficiencies outlined in the whitepaper – expediting the delivery on their long-held promise of cost savings, accelerated settlement capabilities, and post-trade efficiencies,” it continues. “Importantly, however, the whitepaper provides a series of recommendations which can help streamline the TAP now, and in the process, help to shift existing business processes towards a more symmetrical and efficient FX marketplace for all participants.”
The full paper can be viewed here
The Full FX View
FX front offices have a long and (less-than) proud history of disinterest when it comes to the post-trade process – something that pre-dates even this correspondent – but the sense is times are changing.
The GFXD paper reads, above all else, as an attempt to raise awareness of a growing issue – the FX market’s ability to offer a truly competitive service to clients through multiple providers. This is highlighted by the paper noting “long-term revenue opportunities remain under structural downward pressure”…and that “banks need to review the long-term viability of some products and services where the ‘cost-to-serve’ has increased dramatically alongside of bid/ask spread compression.”
This should be the canary in the coal mine for the industry, for while it is true that LPs continue to make good money out of the FX business, the cost of doing that business continues to rise – and not just in brokerage terms. The paper does also highlight that asset managers are also under pressure thanks to pressure on fee structures (largely from ETFs) and their own regulatory burden.
This seems to paint a picture of an industry between a rock and a hard place, with all sides needing to squeeze as much as they can out of the process. What is important to take away from the paper, however, is that one side cannot do it all alone. Another long and less-than-proud tradition in the industry is that banks make all the money, so they can provide all the solutions – and pay for them. This is not the case with allocations, however.
To be clear, some banks need to raise their technology game when it comes to allocations, but some are already there is offering pre-trade solutions. What is needed, and what the GFXD seems to be calling for on behalf of its members, is for more of the buy side to take up these solutions and help out.
Whether this will happen is open to question, purely because some buy side firms simply do not have the technological infrastructure to be able to do it, however if that is the case then surely these firms must be made to pay more? Perhaps a sub-solution to this problem – and it is clearly a long-standing problem – is tiered pricing depending upon the use of technology in the allocation process? You remain heavily manual – pay more.
There is no way of knowing the conversations that take place between GFXD members, but if they are like many I have had over the past three or four years (especially during the quieter periods in the markets), then a number of banks are seriously considering rationalising their FX services. At face value this may not seem a problem for the buy side, because there are a host of non-bank players ready to step in and there’s always one bank willing to accommodate.
If, however, the level of competition drops further (and given the banking consolidation over the past 30-odd years, it is already at relatively low levels), then the buy side faces a serious issue. It won’t be in spot, but competition is badly needed in the forwards and options markets – especially for firms that need delivery.
Some smart technology and process investment now, could save a lot of pain further down the road.
