The Last Look…

Often in our markets the low-hanging fruit for automation has been the interbank, or inter-dealer, market, where participants have access to investment dollars, see the efficiency benefits of technology, and are often at the same level in terms of sophistication. Not, it seems, in FX swaps, but is that about to change?

Before we go any further, I do realise that I have been discussing (occasionally(!) predicting) this for some time now, but previously there never really seemed to be the impetus from the providers, who were happy to have their product in desks but did little to really develop it – that seems to be changing.

Avid readers will know I have already discussed the 360T white paper, which in effect was a showcase for Deutsche Börse’s products, but also made some really good points about market structure development. I was pondering the timing of the paper and concluded that either it was just part of a pre-ordained schedule, or that 360T really does think change is imminent. The answer is probably both, but then throw in the announcement from LSEG that it is dropping brokerage on its one-month and beyond tenors, and the sense is that something may be happening – or at least that there is a new sense of confidence that banks in particular may be ready to listen and, importantly, act.

As I noted in my commentary on the 360T paper, there are still challenges to overcome before we really get to an e-FX swaps inter-dealer market that is highly automated, not least credit and capital processes. Perhaps, though, the pressure on the banks is finally growing to a level where the cost/benefit of implementing credit and capital solutions are at least arguable?

The 360T paper and LSEG Matching bro move are separate issues but the reality is they reflect an early stage of what is likely to be a prolonged battle for screen real estate and volume. The 360T paper is very much aimed at reminding people of the completeness of Deutsche Börse Group’s solutions from a workflow perspective, while LSEG is clearly sensing an opportunity and tapping into growing concerns about costs.

These parallel efforts will continue – it is a competitive space – but the reality is that, as was the case in spot, the market would probably like two primary venues. There are nuances that make this tricky – not least that, as I noted mid-week, the “mid” that all dealers want to trade at, is a variable depending upon the two counterparties – but that seems to be the preferred option.

Somewhere, a broader network has to develop where competitors at a macro level, deal with each other at a micro level

The difference between spot and forwards though, is that the infrastructure that can really help the latter is much more complex. If the FX swaps market structure is going to really advance, it needs to rely upon the network effect. In spot, it’s about connectivity and speed, in forwards it is about easing the credit bottleneck and managing valuable capital resources. At a simple level that means, as the 360T paper pointed out, multiple credit options, including third-party solutions, but it also means multiple capital management tools. Some can be post-trade, such as Capitolis and Quantile – and at some stage I fully expect these to push further into the real-time environment – but others will involve futurisation and clearing, where, currently, the landscape is more fragmented.

Yes, LCH ForexClear, an LSEG firm, dominates in clearing, and yes, 360T’s sister firm Eurex has FX futures, but can one of these broader exchange businesses establish a dominant position alone? In theory they can, if Eurex Clearing comes to the FX futures party in style and sees an unprecedented surge in volume; and if LSEG develops a futures platform, but both seem unlikely at this stage. This means, somewhere, a broader network has to develop where competitors at a macro level, deal with each other at a micro level.

There will also be, it has to be noted, other potential contenders, although no-one seems especially close when it comes to the entire workflow, and these may become connectivity options at some stage in the future. The problem at the moment is that there doesn’t seem to be any momentum behind “co-opertition” efforts, and if greater inter-dealer swaps automation is to play out, I cannot see it happening quickly unless, at a certain level, multiple firms start connecting to each other.

One of the current, highly irritating to me at least, and overblown phrases in the industry is “strategic partnership”, which in reality merely means an LP is connecting to a platform or tech provider. What we are talking about here is a genuinely strategic partnership – one that not only benefits both sides, but also the broader industry. For make no mistake, a large part of the FX swaps market is automated, especially in the D2C space; but the e-ratios would soar (and spreads probably tighten a little bit further down the curve, if the core of the market – inter-dealers – were also more automated when clearing the end risk.

colin@thefullfx.com