Study Finds FX End-to-End Workflow Increasingly Important
Posted by Colin Lambert. Last updated: May 2, 2022
A new study commissioned by Refinitiv and conducted by Greenwich Associates finds “an increasing realisation by the industry and via the FX Global Code of Conduct that the end- to-end workflow is also important to the success of an FX trading desk”. It also finds that these processes are in need of investment and prioritisation to respond to the changing environment.
The study was conducted amongst 81 FX professionals as part of a broader investigation into developments in equities, fixed income and FX markets, and finds that improving the entire FX trade lifecycle is important as the industry recognises the economic, compliance and reputational risks of not integrating phases of the lifecycle. “Embracing new ways of managing and automating trades will yield positive results,” the study states.
The report finds that one issue is how work is getting done and how transactions are managed. Communication and collaboration are continuing to evolve as the workplace changes. “It is necessary within a fast-paced arena, such as FX trading, to be able to communicate with key stakeholders quickly and efficiently,” the report observes, adding that as communications are more digital, new compliance tools and oversight are required to manage them.
In terms of top priorities, ‘digitally communicating with colleagues’ was number one – perhaps unsurprisingly given we are just exiting lockdowns around the world – with 60% saying they are spending more time on this; equally, 58% cited digitally communicating with customers.
The same percentage, 58%, say they are spending more time on working to automate processes and workflows, while 42% said they were busy ‘manipulating/analysing data’.
Within the automation theme, the survey also sought to investigate the level of automation in respondents’ firms, 30% were completely automated on trade execution (4% were not at all automated, which is eyebrow-raising in this day and age); while 25% were completely automated in the post-trade processing space (again, 4% were not at all automated).
There were also significant percentages recorded under ‘not at all automated’ for order entry (11%); pre-trade price discovery (12%), order staging into OMS/EMS (11%); and responding to incoming RFQs (7%). Further away from the trading process, 9% had no automation around market risk limits; 6% around post-trade TCA; 11% on regulatory reporting; 16% on compliance checks; 10% on risk management; and 17% around credit/counterparty risk management.
Observing that the need to automate is required across a series of initiatives, Refinitiv says in the study, “Whilst improvements at each stage help, the interconnectedness of the processes and trading more broadly necessitate a holistic review. FX transactions are sometimes a consequence of trades in other asset classes, such as equities. A timely example of that interconnectedness is that, as the US equities industry moves to T+1 settlement, there will be a corresponding focus on efficient FX settlement to ensure traders have the right currency to settle their equity trades.
“The end-to-end FX workflow is comprised of many steps; the most prominent, of course, is the trade execution itself,” it continues. “Whilst voice trading still accounts for roughly a quarter of FX transactions, according to Coalition Greenwich data, over the past decade there has been increasing usage of algorithms, API aggregators, multi-dealer platforms, and other more- electronic and automated ways of trading. It is not surprising, then, that trading is viewed as the most automated part of the workflow.”
Away from the trading process, Refinitiv adds, “Whilst these operational risks open a firm to the direct cost of a processing error, they can also easily transform into reputational risks. In addition, the FX Global Code has reinforced the need to automate, embed straight-through processing (STP) and streamline processes to increase robustness, further encouraging firms to improve the process.”
The study finds regulatory reporting at the top of the agenda for processes to be automated, with 51% citing that as item number one, followed by risk management (47%); compliance checks (44%); post-trade processing and market risk limits (41%); post-trade TCA (38%); pre-trade price discovery (37%) and trade execution at 33%. Less focus is likely, based upon the survey’s findings, upon order staging (26% cite it as a priority); responding to incoming RFQs (25%) and order entry (19%).
“Regulatory reporting is a key element of regulation in a firm’s compliance obligations, but one that many have struggled with,” Refinitiv says. “Regulatory reporting and settlement are priorities, but perhaps are not revenue- or alpha-generating. Rather, they are short-term necessities to reduce cost and risk.
“Margin processing, though further down in the queue, is both a short-term compliance need and a longer-term opportunity to add value to the FX process via collateral optimisation,” the report states. “There are many factors in the decision, for example, on whether to clear a non-deliverable forward (NDF) or trade it bilaterally. A collateral optimisation tool can provide insight into the collateral implications of that decision.”
While there is an unsurprising majority citing available liquidity as the most important selection criteria for a platform, interestingly, algos register only 11%, suggesting that adoption remains patchy and sporadic across the industry. More important, according to respondents, are end-to-end workflow (46%), post-trade integration with OMS (35%) and choice of execution styles (34%).
The most important tool that “participants can’t live without” was email at 22%, followed by market data terminal at 19%, and Office tools at 14%. Trading venue access was at 14%, followed by chat/collaboration tools, which only registered 6% in this segment of the survey – far behind the phone at 14%.
Perhaps with one eye on past scandals in the FX industry, Refinitiv says in the report, “Compliance oversight of collaboration must evolve at least at the same pace as the collaboration tools themselves. There could therefore be an effort to consider what data is being exchanged via these collaboration tools and determine a better way to control that data exchange. For example, emails may be sent to confirm the status of an FX settlement; these exchanges may include sensitive data. Alternatively, an API can be built to automatically send settlement status messages, thus eliminating the email, and improving data privacy and protection.”
The firm then stresses the importance of moving away from email, which it says is “an imperative” not only because it can be inefficient, but also because there are collaboration tools that allow stakeholders to provide key auditing capabilities, allowing for monitoring and archiving for compliance, surveillance and trade reconstruction opportunities. Over half of respondents manually enter data from one application to another, the firm observes.
The Full FX View
While the growing importance of data and end-to-end workflow should surprise few of us, perhaps of more interest in the report is the subject of vendor consolidation. There have been rumblings about this for several years now, kicked off by Citi seeking to reduce the number of FX platforms it engaged with in 2018, but momentum seems to be gathering.
Anecdotal evidence suggests that the current volatility and, presumably, enhanced returns, for FX players has not, as may have happened previously, curtailed work to reduce costs. The challenge remains, however, getting customers to actually agree to a shift from one vendor to another channel.
At face value such a shift should benefit the one-stop shops offering solutions across workflows and asset classes, but again anecdotally – and taking into account the challenges of shifting customers – more LPs seem to be looking at the individual cost associated with a specific vendor. In these circumstances, the evolution becomes less defined as it may have seemed. The only way the consolidation happens, in reality, is likely through M&A. The problem facing anyone trying to consolidate in the current world is that fragmentation has gone too far – too many participants are embedded with too many providers and few are willing to embrace the cost of change, even if there is a reasonable technology case.
There is one other area of report that is interesting – a survey of the most important skills on an FX trading desk over the next one-to-three year. Data science came top at 64%, followed by market experience (time in the industry), and market knowledge, both at 63%. Multi-asset class (60%) and market structure (52%) knowledge followed, chased by relationship management (49%); general technical aptitude (44%) and programming/coding skills at 43%.
Give the relatively nascent nature of data science, and the fact that decent market experience/knowledge is widely acknowledged to exist in people with seven-to-10 years behind them, perhaps it is no wonder that there is a glut of jobs in FX at the moment!
Although the need to invest to build a robust end-to-end workflow is clear, Refinitiv acknowledges short-term budget challenges and says there are multiple strategies to reduce costs. When business leaders in all asset classes were asked about their strategies to reduce costs, they name vendor consolidation, automating trading and reducing office space as focus points.
Breaking this down further, half of sell-side respondents state they are most inclined toward vendor consolidation, whereas the buy side is focusing on increasing the use of cloud computing and post-trade automation. Many sell-side firms maintain multiple overlapping technologies, the survey finds, adding that sometimes this is due to acquisitions; other times, their installed vendors have expanded the breadth of their products to the point where it competes with other systems. “The goal of vendor consolidation is not simply consolidation for its own sake, but to solve some of the handoff issues within a workflow, by processing as much of the flow as possible on one system,” the report states.
The buy side continues to become more inclined to use cloud-deployed technology. The technology strategy of new asset managers, for example, will more heavily incorporate cloud to avoid the challenges of enterprise-installed applications, the report observes.
Unsurprisingly the study finds data is the most important element in a trade lifecycle, an aspect where the majority prefer ‘buy’ over ‘build’ with 61% citing it thus – far ahead of the 35% citing FX product pricing and risk analytics as an area to buy vs build. 29% prefer buying trading solutions for liquidity aggregation and distribution; 28% liquidity aggregation tools; while 6% of respondents said they build everything in house.
Further out on the timeline, the report says the potential that DLT and tokenisation will alter the market “is real”. It notes that one way will be changes to the settlement processes, “especially given that some participants view settlement as needing improvement, there may be certain investments to help automate existing processes”.
The report does add, however, that we could see a parallel stream where newer methodologies, such as atomic settlement of DLT currencies in FX, are studied and implemented.
Noting the market is now somewhat split between CBDCs and other DLT-based currencies, the report finds that should CBDCs grow, the implications will be broad, as atomic settlement could result in central banks losing control over the trading of their currencies, thus hindering their ability to implement capital controls.
Further, if a trade is settled ‘atomically’, credit risk would be removed,” it continues. Credit monitoring, credit allocations and credit limits are all currently embedded in many FX trades but are difficult to manage. Removal of credit could then encourage more buy-side to buy-side trading, which would be a significant shift in market structure. These tokenisation trends may not be implemented as quickly as other tools that more marginally improve the workflow, but would have a more transformative outcome. “The implications of atomic settlement could extend beyond the exchange of currencies and more fundamentally change the industry.”