The Last Look…

I have long been a sceptic on mainstream multi-asset class trading, largely because of the challenges of very different market structures, clients’ increasing desire to get the best price for every facet of a trade, and the plain fact that different providers have particular areas of strength and focus – no-one really dominates in every asset class. Could that change, however, thanks to a bit of reverse engineering?

For years, so much innovation has either come from, or been focused on, the front office, but the surge in interest in stablecoins and tokenisation more generally has seen this focus shift to the post-trade – and it is here that a multi-asset class future could take shape.

I should stress, this is not my idea, rather it is my conclusion having read a very interesting paper by Deutsche Bank strategist Rohini Grover entitled Tokenised money and the future of FX. The paper takes the reader through the various challenges and opportunities of tokenisation, specifically stablecoins, tokenised commercial bank money and tokenised central bank money, and places each in the context of the FX market’s evolution.

At the heart of the paper is, as Grover writes, “The key question [of] not whether the technology is feasible, but whether it can achieve sufficient scale, interoperability and integration with existing financial market infrastructures to deliver meaningful improvements in cross-border settlement and capital market efficiency.”

At a high level, and something I have argued before in these pages, I see tokenisation and the subsequent settlement initiatives it can support as being a good route to solving the challenge of increasing the volume of FX trades settled via Payment-versus-Payment (PvP). CLS, as the paper stresses, plays an important role in today’s FX market and provides liquidity and multi-lateral netting that tokenisation and atomic settlement currently cannot (that is not to say that the next technology innovation in this space delivers just that of course). Where new initiatives can come in is in filling the gaps that CLS simply cannot fill (and into the bargain possibly providing an all-important redundancy solution).

Another regular opinion from me has been that a fair number of FX market participants don’t actually want atomic settlement, they want to net either at the end of the day or in certain windows. That is not to say, however, that there is not value in the concept.

The Deutsche paper concludes, “The transition towards programmable settlement is…likely to involve both risk reduction and risk transformation.” In other words, the coming market structure changes will likely involve a degree of hybridisation – a full tech version can wait for further down the road.

The paper also observes there is potentially a stronger use case for wholesale FX in the wider tokenisation of capital markets – and it is here that the reverse engineering could take place. If securities, bonds and derivatives are tokenised, in other words programmable, then there has to be a case for adding in the FX piece – initially for settlement perhaps, but more pertinently through linked execution.

This would allow what we could term the “real economy” users of the FX market – corporates and investors – to take significant risk out of the system by settling all legs and hedges instantly. It should be noted that for many, this would not meet their current best execution guidelines (although links will inevitably build between platforms and LPs in different asset classes) but the savings through operational risk reduction will probably make up for that – as long as they actually do the right analysis!

In this scenario, the argument for multi-asset class, or linked, trading becomes much stronger because there is a cost/risk reduction factor involved, rather than the need to press less buttons which is how too many currently frame the opportunity. In a tokenised world, inter-operability becomes hugely important – a point made in the Deutsche paper – but achieving it in the workflow can feed back to the execution and finally deliver what people have been talking to me about for 25 years or more.

colin@thefullfx.com