Cloud technologies, mobile computing and advanced algorithms are helping FX traders improve pricing and compliance, as well as productivity.
Do you have five milliseconds? Innovation has been fast and furious in the foreign-exchange market in the past year. Not only has the speed of trading been ratcheted up, but major changes also have been made in pre- and post-trade processes to improve efficiency and analysis, and to ensure compliance with new regulations.
Corporate treasurers and investors are increasingly demanding customized solutions that work across various asset classes. They want big-picture views of the markets and proof they are getting best execution, as required by MiFID II, a European Union financial directive. The bulk of FX trading is now electronic and is increasingly conducted via mobile phone.
The falling cost of computer technology, open-architecture designs and the widening use of Cloud-based solutions are giving market participants the ability to control the entire trade life cycle. Treasurers and controllers have access to liquidity from scores of major banks and a growing array of nonbank participants. The adoption of execution algorithms is increasing, as human traders give way to machines.
A wave of innovation built on Cloud-based technologies is fundamentally transforming financial institutions, as they spend enormous sums to comply with international regulations, according to new research from the TABB Group. This incentivizes firms to look to “Cloud-focused, enterprisewide approaches based on the latest financial technology (fintech) innovations, to not only solve their compliance challenges but reduce costs and create competitive advantage,” writes the TABB Group’s Monica Summerville in a research note.
“The relatively new market segment, dubbed regtech, utilizes a fintech-based approach to meet regulatory, risk management and surveillance requirements,” writes Summerville. “This segment is growing quickly, with solutions offered by both incumbent and start-up vendors, the latter receiving significant venture capital investment,” she says.
The foreign exchange market is the biggest in the world, trading $5.3 trillion daily. Trades are increasingly subject to transaction-cost analysis, although margins are so thin that many large corporations are more concerned with processing efficiencies to improve productivity rather than pricing. Changes to the way corporations view and manage their FX exposures have given them new insights into their businesses and how to run them in real time.
As the FX market structure evolves and new regulations are implemented, corporate treasurers, asset managers and hedge funds are increasingly pressured to demonstrate best execution, says Neill Penney, managing director and co-head of trading at Thomson Reuters. Simultaneously, banks are increasingly engaging in various forms of agency trading, as their risk appetite decreases and cost of capital increases, he says. As a result, Penney adds, there is strong demand for execution tools that can provide more transparency and better performance.
BANK OF AMERICA MERRILL LYNCH | FX Trade & Pay
In many companies, an FX transaction and its related payment transaction are completed by separate groups or on different platforms. A company can
achieve greater efficiency and automation by having access to both capabilities in one tool. With FX Trade & Pay, the workflow is reversed; treasurers make FX trades in advance and then use the funds as needed to make cross-border payments. This provides FX rate transparency up front.
Ather Williams, head of Global Transaction Services at Bank of America Merrill Lynch, says: "As more and more companies seek growth outside their home borders, we have the opportunity to invest in and develop the next generation of cross-border payment solutions to help them realize their financial goals. FX Trade & Pay is another demonstration of our focus on innovation, combining the best-in-breed hedging and payment tools."
The product was made commercially available this year, although some early adopter clients went live in 2016.
"The FX Trade & Pay solution combines FX risk management with payment approval and delivery," says Liz Minick, head of global
cross-currency product and strategic client capabilities in Global Transaction Services at BofA Merrill Lynch. "The solution suits large, medium and small companies that use our Web-based platform CashPro Online; and it is especially relevant for companies operating in today's environment, where cross-border payments are growing at an exponential rate."
CAMBRIDGE GLOBAL PAYMENTS | Cambridge Link Mobile Application
The new Cambridge Link Mobile Application, which was officially launched this year, beginning in North America, the UK and Australia, allows clients to securely trade FX anytime, anywhere. Users can review balances, get quotes or book a trade, and access real-time market trends and news. The app provides a quick and easy method for financial executives to access Cambridge Global Payments accounts while on the go.
Corinne MacMillan, chief technology officer at Cambridge, says: "Mobile payments have become an indispensable payment method for today's consumers. At Cambridge, we believe mobile payments shouldn't be just in the hands of consumers; this is why we are pleased to introduce a mobile experience designed to meet the FX trading and international payments needs of businesses." Cambridge Link gives clients access to all the banks the company deals with in 170 countries. It includes Cambridge's own database of routing and country regulations and offers detailed messaging to improve delivery speeds and lower the number of undelivered payments.
Clients with access to the new mobile app will no longer have to call or fax information to conduct spot trades and leave market orders. Cambridge continuously monitors and assesses its clients' pain points, to develop processes that automate their daily practices or provide solutions that combine multiple tasks into one. This enables the firm to offer unique innovations and observe overall financial-services trends to stay ahead of the competition.
CITI | CitiFX Gateway
CitiFX Gateway uses advanced API technology to route FX hedging requests across Citi's global franchise. A rules engine separates small and large deal sizes,
so clients can focus on what is important. Global investors with localized FX requirements can automate as much as possible, while maintaining the integrity of their hedging process.
"For the multinational company dealing with Citi, this solution allows for a new degree of automation to deal actively in more countries than any other bank," says Yi Hahn Chin, head of EMEA eFX solutions at Citi. "Along with Citi's corporate hedging platform, CitiFX Pulse, our clients have full end-to-end automation in active FX risk management."
For example, a corporate treasury in Geneva with a treasury management system (TMS) across its business is able to set its FX forecast for its South African subsidiary, which has a mandate to execute locally. Thereafter, the exposure is routed as an FX forward request to Citi's Johannesburg branch, where it is executed and sent automatically to the company's TMS.
"The additional automation leads to more-granular formulation of hedge strategies and potential reduction in cost of carry by hedging locally," Chin says. "Gateway is unique, not just because of Citi's global footprint, but also because of the diversity of our execution venues, which can be tailored to a client's strategic objectives."
Gateway supports spot, forward and swap instruments across more than 70 countries. The product addresses a core issue for large global corporations: how to manage FX risk across their business.
NEX MARKETS | EBS Live Ultra
The need for speed remains a constant in the FX market. NEX Markets (formerly EBS BrokerTec), a NEX Group company that provides electronic trading
technology and services, enhanced its EBS Live Ultra data feed to provide spot FX data at five-millisecond intervals. That makes it the fastest live-streaming data feed available from a primary FX market venue. The low latency data feed increases market transparency, efficiency and liquidity, while supporting the maintenance of a continuous order book.
Seth Johnson, CEO of NEX Markets, says: "We are committed to ensuring that the FX market has a reliable and liquid primary market. EBS Live Ultra reflects our constant efforts to improve and enhance the services that we offer via the platform and support a strong and healthy market ecology."
EBS Live Ultra data is derived from EBS Market, EBS BrokerTec's central limit order book. "Since launching EBS Live Ultra in September 2016, the improved data feed has had a positive impact on spreads, market depth and transparency," says Tim Cartledge, global head of FX & head of product at NEX Markets. "Client feedback has been very positive, and we are very confident that the additional
enhancements will further support customer requirements and a positive market environment."
NEX Group, based in London with offices worldwide, partners with emerging technology companies to offer better ways to execute trades and manage risk while reducing costs.
RIM TEC | FiREapps for Cash Flow
FiREapps for Cash Flow changes the way companies manage their cash flow forecasting and resulting FX exposure management through an end-to-end process. Based on early results, clients using the product are realizing an increase in participation in forecasts from controllers in the field and a significant improvement in forecast accuracy. Anomalies are highlighted, baseline forecasts are generated, and all forecasters share a consistent starting point prior to forecasting. The product was made available in February 2017.
FiREapps for Cash Flow is a Cloud-based solution created specifically to address the cash-flow challenges faced by corporations with foreign currency exposures. In addition to its help in calculating recommended hedging actions, the solution enables companies to more effectively manage the entire work-flow process. It captures data in a single system and consolidates it instantly in a single format. This improves the ability of corporations to hedge effectively with better-quality data.
Based in Scottsdale, Arizona, FiREapps, a division of Rim Tec, was founded in 2000. It publishes a quarterly Currency Impact Report quantifying the negative impact on corporate earnings as a result of FX exposures. FiREapps analyzes the earnings calls of 1,200 publicly traded North American and European multinational companies each quarter. The total negative impact in the second quarter of 2017 was $10.3 billion, with $6.9 billion coming from North American corporations alone.
TD SECURITIES | Valuation Services
Valuation Services is a technology application built by TD Securities across fixed income and FX trading to provide clients with unified analytics, pretrade
pricing and customized pricing streams in real time. This full-view, cross-asset platform runs across multiple vendor systems.
"We responded to demands from our clients for full-view solutions of the market," says Dan Bosman, managing director at TD Securities. "We decided to build our own cross-asset platform by leveraging open technologies that industries other than financial services might use."
Bosman adds: "We work like a software company, with frequent automated releases, constantly introducing new product features. Our focus on cross-team collaboration led to the creation of our inner-source development model, which has rapidly accelerated our time to market and increased the adoption of this platform across FX and rates."
Teams are empowered to think like owners and look for opportunities to challenge the status quo, he says. TD Securities also sponsors an internal competition that allows employees to bring innovative ideas to the fore.
The Valuation Services platform has enabled the firm to introduce and trade new products, such as local currency nondeliverable forwards. In addition, the firm's traders are better able to manage risks with real-time aggregation across multiple trading platforms, giving them a full view of the markets.
THOMSON REUTERS | FXall Dynamic Provider Selection
Thomson Reuters' new FXall Dynamic Provider Selection enables users to choose providers based on transaction-cost analysis of their previous trading
activity. This allows them to demonstrate best execution under new MiFID requirements. FXall's new multibank batch features allow users to execute up to 200 trade requests in competition simultaneously.
Neill Penney, managing director and co-head of trading at Thomson Reuters, says: "Many FXall customers need to ask multiple liquidity providers for a quote for each trade, in order to achieve the best possible price in the market. This can result in an unwieldy provider panel, leading to information leakage in the market." Manually selecting smaller provider panels is time-consuming and raises a possible question from compliance as to whether the customer chose the right subset of providers, Penney says. Dynamic Provider Selection enables the customer to automate this process, using each provider's historical performance to guide selection quantitatively.
"The customer has control over overall panel size and can choose the right balance between including top-performing providers and giving all providers the opportunity to win business," Penney says.