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eFOREX e-e-FOREX FOREX january 2006

transforming global foreign exchange markets

visit us at www.e-forex.net

What's a customer? - electronic FX converging the buy and sell sides

The Anonymous FX Trading Model - why is it so appealing?

Regional eFX perspective - spotlight on Scandinavia

FOCUS on Treasury Best Practice - the role of FX automation

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l i q u i d i t y. . . r i s k m a n a g e m e n t . . . S T P. . . e - C o m m e r c


e-Forex

welcome to

Winter 2006

HAPPY NEW YEAR! Susan Rennie

Michael Best

Susie@Aspmedialtd.com Managing Editor

Michael@Aspmedialtd.com Subscriptions Manager

Charles Jago

Louis Riley

burden. We have highlighted how extending the benefits of FX

Charles@Aspmedialtd.com Editor (FX & Derivatives)

Louis@Aspmedialtd.com Features Manager

STP and automation can assist in compliance with standards

Charles Harris

Anthony Bannan

such as Sarbanes Oxley and IAS 139, by eliminating all

Charles@Cjag.demon.co.uk Advertising Manager

Anthony@Aspmedialtd.com Commercial Manager

Helen Rochford

Helen Murray

Helen@Aspmedialtd.com Production Manager

Photography

major topic in this edition has been the role that eFX

A

systems are playing in helping organisations comply with the ever increasing regulatory and governance

unnecessary manual intervention and standardising the transactional process. Although the impact of new standards may well vary according to market segment, the imposition of increased volumes of regulation is sure to be a major driver in the future evolution and adoption of eFX and will create a need for additional technology. Already many technology vendors have noticed an increased

ASP Media Ltd Suite 10, 3 Edgar Buildings George Street, Bath, BA1 2FJ United Kingdom Tel: +44 1225 868 947 (switchboard) Tel: +44 1225 868 948 (e-Forex sales & editorial) Fax: +44 1225 868 998

demand for integrated tools that add compliance to the STP path and of course the added focus on control brought about by these regulations may provide treasurers with an ideal opportunity to justify and secure new budgets for investing in the technology to further automate their treasury and FX activities. The EU Markets in Financial Instruments Directive (MIFID) is due to be implemented in 2007. With its focus on increased rigour around client reporting and disclosure of fees and charges to clients, coupled with significant order handling requirements and

Design and Origination: Phill Zillwood Design Works Phill.design@btconnect.com Printed in the UK by Broglia Press e-Forex (ISSN 1472-3875) is published quarterly in January, April, July and October www.e-forex.net

Subscriptions Subscription rates (including postage) UK & Europe: ÂŁ120 per year Overseas: ÂŁ150 per year Please call our subscription department for further details:

obligations regarding pre and post trade information publication, the directive could have a significant impact on the Electronic FX environment. We plan to examine these issues in our next edition. A new regular feature we have included in this edition is the Product Spotlight. Let us know if you would like your innovative, new eFX products to be the focus of this article in the future. As usual we hope you enjoy this edition of the magazine.

Charles Jago Editor

Subscriptions hotline: +44 (0) 1225 868 948 Although every effort has been made to ensure the accuracy of the information contained in this publication the publishers can accept no liabilities for inaccuracies that may appear. The views expressed in this publication are not necessarily those of the publisher. The entire contents of e-Forex are protected by copyright and all rights are reserved.


Companies and organisations in this issue: A ABN AMRO Achelon Group ACI ACM Aegis Agricultural Bank of China Aspect Capital B Bank of America Barclays Capital Baxter Solutions BDRC Bertelsmann BGC Bloomberg BMO Nesbitt Burns BNP Paribas BOCOM Brown Brothers Harriman C Calyon Cantor Fitzerald Celent Communications Chicago Mercantile Exchange Chieron Trading China Construction Bank CITIC Citigroup City Practitioners CLS bank Cognotec CPSS-IOSCO Currenex D Danske Bank

page 34 page 111 page 22 Inside Front Cover page 85 page 14 page 124

page 9 page 10 page 17 page 36 page 84 page 60 page 61 page 74 page 39 page 14 page 43

page 6 page 59 page 58 page 111 page 113 page 14 page 14 page 6 page 30 page 22 page 7 page 22 page 57

inside Back Cover page 31

Deutsche Bank E EBS Ericsson ESCB/CESR eSignal eSpeed Eurex Eurobase

pages 4 & 5 page 64 page 22 page 117 page 59 Outside Back Cover page 12

F Federal Reserve FIX Protocol Org. FlexTrade FNX Forex Capital Markets ForexManage FXall FXDirectDealer

page 22 page 107 page 101 page 87 page 119 page 83 page 23 page 123

G GAIN Capital GFI GlobeOp Green River Computing Greenwich Associates

page 115 page 29 page 16 page 99 page 58

H Handelsbanken HotspotFX HSBC

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page 81 page 13 page 56

I IFX Markets Integral Development Corp Interbank Group ISDA

page 33 page 15 page 113 page 22

J JH Financials JP Morgan Juniper Networks

page 113 page 6 page 98

L Lava Trading Lufthansa

page 60 page 84

M Merrill Lynch MIG Investments Misys

page 56 page 97 page 89

N Nordea

page 69

O Oasis Research Option Computers Oracle Orc Software

page 112 page 39 page 100 page 64

P PriceWaterhouseCoopers

page 90

R Rabobank RBS Financial Markets Refco Capital Markets Reuters Riksbank Royal Swets and Zeitlinger

page 19 page 6 page 22 page 58 page 64 page 85

S Saxo Bank Saxon Trading SEB Merchant Bank Skandia Capital SmartTrade Societe Generale Standard Chartered Bank State Street Corporation Stentra StrategyRunner Sungard SuperDerivatives Swedbank Swiss Postfinance

pages 24 & 25 page 112 page 66 page 65 page 51 page 8 page 12 page 59 page 48 page 116 page 65 page 14 page 21 page 86

T 360T Textron TF Network Townsend Analytics TraderTools TradingScreen Traiana Tremont Capital TWIST

page 6 page 85 page 72 page 47 page 37 page 20 page 55 page 56 page 65

U UBS

page 74

W Wachovia Wall Street Systems

page 11 page 93

X Xconnect Trading

page 113

january 2006 e-FOREX

Godfried De Vidts Focus on risk

Philippe Buhannic What's a customer?

Andrew Kidd Middle market e-FX

Peter Kriskinans Front & middle office

Michael Laven Tri-Party Credit Analysis

Harrell Smith Anonymous FX trading

Sebastian di Paola Sarbanes Oxley

Dr Anna Becker Automated Trading

Greg Michalowski Slippage

Christian Baudoin The e-Forex Interview


January 2006

contents

Foreword 22. This time we have been lucky! Godfried De Vidts looks at the lessons learned from the recent Refco case.

Features 26. Leader – What’s a customer? Electronic FX converging the Buy and Sell-side. Philippe Buhannic examines the new FX market structure and how the role of the buy and sell-sides will continue to blur further in the future. 30. Risky Business: Improving Risk Management strategies in the online FX environment. Paul Ronan considers some of the credit and market risks faced by banks in the rapidly developing online FX environment. 34. E-FX – on the way to meeting the needs of the middle market. Andy Kidd discusses how web technology is providing opportunities to deliver the services and functionality that the middle market segment needs. 38. eFX - Unifying the Front and Middle Office Environments. Peter Kriskinans outlines how unified streams of interactions and deals provide valuable information and how a unified approach benefits sell side banks. 44. Broadening client connectivity - improving backoffice processing. Nick Dyne identifies how the post FX trade environment still offers possibilities for exploiting the benefits of automation and technology. 48. Improving Customer flow quality: making best use of technology to monitor market making profitability. James Kemp takes a look at ways in which service providers can make best use of technology to monitor the quality of customer flow. 52. PRODUCT SPOTLIGHT The Mark to Market Monitor (MMM) from BAXTERSolutions Kft. 54. Extending Technology innovation to Tri-Party Credit Analysis. Michael Laven illustrates how automation of the credit analysis process has resulted in increased confidence from the large financial services institutions to expand their business 58. Privacy Please – the attraction of anonymous FX trading. Harrell Smith examines how the inflow of capital into the hedge fund community will lead to more firms exploring the use of trading platforms that offer anonymous execution. 62. Regional eFX Perspective: Scandinavia. Andy Webb looks at eFX within the region. 70. VIEWPOINT: Pulling in the reins - offering liquidity on a selective basis.

102. FORUM: e-FX Technology: powering the growth of new trading opportunities. With Misys, FNX, Townsend Analytics, Wall Street Systems and Cognotec. 110. Online Technology - a key differentiator for Trading arcades and prop shops. Heather McLean interviews industry players to see why Trading Arcades & Prop shops are growing in influence and how their trading models differ. 116. Automated trading solutions – FX trading of the future? Dr Anna Becker looks at the development of automated programs designed to maximize FX trading revenue and efficiencies, and the levels of customisation that are now available. Risk Management strategies

120. Traders WORKSHOP: Slippage Greg Michalowski talks about Slippage in FX trading and how to minimize its impact. 124. CASE STUDY: eFX technology – helping to minimise the problem of Slippage at Aspect Capital.

The e-Forex Roundtable 74. Squeezing efficiencies – where will the benefits of eFX be focused next? With Deutsche Bank, Bank of America, UBS, Brown Brothers Harriman and BMO Nesbitt Burns

FOCUS: Treasury Best Practice – the role of FX automation

Unifying Front & Middle office

80. Best execution - a fundamental part of best practice Keith Hill explains how best execution may have become a fundamental part of best practice in FX trading, but there is still considerable disagreement about how to define it. 84. e-FX and Best Practice in the Treasury environment. Heather McLean speaks to several leading international companies about the best practice advantages for their treasury departments of using eFX technology. 90. Automation in Treasury - facilitating compliance with Sarbanes-Oxley. Sebastian di Paola examines how automating FX trading can assist in meeting Sarbanes-Oxley compliance.

Customer flow quality

94. Why automation for IAS 139 is a must have - not a nice to have. Jiro Okochi identifies the key areas within hedge accounting that would benefit from automation. 98. CASE STUDY: How Juniper Networks turned its FX Hedging activity into a straight through process.

The e-Forex interview 127. With Christian Baudoin, global head of e-Forex at BNP Paribas.

Tri-Party Credit Analysis

january 2006 e-FOREX

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news Continued development of

JPMorgan eXpress FX JPMorgan is continuing to develop its JPMorgan eXpress FX platform and has recently added the ability to leave on-line orders. The 'Leave Orders' service includes flexible, automated order functionality. Users will be able to place 'Limit', 'At Best' and 'Stop Loss' orders. The orders will be automatically filled by JPMorgan. “Automating the order process will save time since there is no need for confirmation over the phone once the order has been filled” says Elena Theodorou Head of FX eCommerce Sales – EMEA. The process will eliminate errors and facilitate Straight Through Processing (STP). Placing orders via JPMorgan eXpress FX enables complete trading records to be maintained electronically for ease of reporting Elena Theodorou and monitoring. Additional functionality includes partial fill. Clients will be able to see the status of the order, along with a visual display of the tranche executed. JPMorgan's increasing investment in its e-commerce offering compliments its recent spate of hiring to its e-sales teams globally.

RBS

to add FX Electronic Orderbook

RBS will shortly be adding a new system, FX Electronic Orderbook, to its foreign exchange dealing platform. Aimed at making access to RBS’ foreign exchange trading desks even easier for clients, the FX Electronic Orderbook allows spot and forward orders to be submitted electronically - 24 hours a day.

The new system can handle a range of orders from the simple to the complex – including combinations of Order Cancels Order and If Done Other. Clients retain complete control with the facility to not only monitor, amend and cancel orders in real-time but also set-up exclusion periods in advance. FX Orderbook will operate through RBS’ browser-based website Trade or via an API linking directly with clients’ own systems. (www.rbsmarkets.com/fxorderbook)

Citigroup introduces CitiFXTM Flow Weighted Indices Citigroup has announced the introduction of CitiFXTM Flow Weighted Indices (CFWI), a set of cutting edge tools created to assess the value of a currency based on today’s composition of the foreign exchange market. The indices represent a significant departure from the composition of the market indicators, such as Trade Weighted Indices (TWI) and Effective Exchange Rate.

The CFWI will be updated annually and incorporate all flows from all client types. The currency weights will be calculated from the last three years of flow data, which allows the weights to be statistically robust and dynamic. The 10 currency indices will be calculated in real-time and available on Reuters and Bloomberg under the symbol CFWI <GO>.

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Calyon provides liquidity through new e-channels Calyon now provides liquidity through two new electronic channels (360T and CFETS) on top of the existing ones: Proprietary, FXall and Currenex. The bank also now offers 24h pricing on G10 currencies in FX Spot, Outrights and Swaps.

Clients can also receive their deals via an integrated STP solution (available in TOF, XML, CSV formats): They will, for example, trade on the platform (directly or via any ECNs Calyon is connected to) and receive the deal flow in real time, either directly to their in-house system or as a flat file. Calyon is focusing on developing long-term global partnerships with clients and offering a 24-hour dedicated multi-lingual Client Services team as well as integration support.


ARE YOUR EXECUTABLE STREAMING RATES THIS FAST? Cognotec RealStream™ offers genuine one-touch trading and enables banks to offer true streaming bespoke pricing. Intelligent positioning of critical data facilitates the seamless integration of rates and execution enabling the delivery of instantaneous trade execution across all trading channels. In addition to bespoke pricing Cognotec RealStream™ provides built-in safeguards that protect the bank against off market prices and unusual trading activity there by enabling the bank to retain complete control. As • • • • •

a result of major technical innovation RealStream™ is: Bespoke – true executable streaming rates tailored to your needs Instantaneous – real-time prices dynamically updated Intelligent – one key stroke by the client completes the deal Scalable – enhanced distribution with built-in scalability Reputable – buy into an outstanding record

RealStream

TM

DEALING IN EXPERTISE The Future of Executable Streaming Rates

www.cognotec.com/realstream.html info@cognotec.com New York +1 212 433 1520 London +44 (0) 207 448 5917 Singapore +44 65 6837 2008 Tokyo +81 3 3507 5776


news SG adds e-confirmation functionality to SGFX Trade E-confirmation is a Société Générale Investment Banking service for its counterparts in capital market transactions that have subscribed to the on-line deal confirmation service which is available 7 days a week, 24 hours a day. Using this functionality a customer can handle the validation process (confirmation,validation or refusal) very quickly and easily. All important transaction information is now listed directly on the front screen, and a mass validation is authorized.

Deutsche Bank releases new version of autobahnFX Deutsche Bank has released a new version of autobahnFX. The new release includes many new functional and technical enhancements, amongst them a robust Rich Client User Interface, Laddered Pricing and Trade Weighted Indices (TWI). These new enhancements help autobahnFX differentiate itself amongst other single bank portals.

SGFX Trade is Société Générales proprietary Forex and Money Markets e-trading platform. It’s a monobank platform dedicated to the entire range of SG clients from SME’s to large institutional or corporate clients. The profile of current SGFX Trade clients’ has proved to be well beyond the geographical boundaries of Europe and that’s why SGFX Trade will be operational 24/24 in the near future.

Bank of America enhances FX dealing platform As part of its ongoing commitment to delivering a world-class FX service for clients, Bank of America has launched FXtransactTM Dealer. Clients are now able to access Bank of America two-way streaming tradable prices in spot, forwards and swaps over FXtransact Dealer. Screens and functions are customizable by the individual user, and detachable trade windows allow the main application to be minimized, preserving screen real estate. FXtransact Dealer is the latest addition to

Laddered Pricing which allows each user to customise the amounts they see streamed to them. Each amount is priced dynamically according to size and the user can trade direct from their Liquidity Window screen. Laddered Pricing is also available via a new Rates API. Deutsche Bank now also offers electronic pricing in its full suite of DB FX Indices – comprising both Trade Weighted and Regional Currency Baskets.

Saxo Bank opens headquarters in London Saxo Bank’s primary focus of expanding into London lies within the institutional space and it’s London office is scheduled to be up and running in the first quarter of 2006. Saxo has recently focused on attaining formal FSA approval and finding a suitable domicile. With that in place the company is now turning its attention to the recruitment effort lying ahead.

the e-FX suite of solutions Bank of America provides for its client base, and includes streaming tradable or indicative APIs in various protocols, STP APIs, integration with Payment and Settlement and Cash Management solutions, and a set of White Label offerings.

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Peter Klein, Director of Saxo Bank UK says, “We’re delighted that the FSA has granted us their approval, and we’re looking forward to intensifying our search for skilled and professional institutional sales people from the financial markets. The London office is an important initiative that provides the bank with better access to the world's largest pool of qualified financial personnel.”

Peter Klein


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news

Capital Forex using ForexManage

Russell continues FX Trading build up with LavaFX

Capital Forex, the FX arm of the London Capital Group have launched ForexManage's browser-based online dealing system to their retail clients. 'With hosted market-making, risk-control and back office, we have a highly flexible system to help Capital Forex win customer business.' says Andrew Gibson, Sales Manager at ForexManage.

Russell Investment Group has begun using LavaFX™, Lava Trading Inc.'s electronic foreign exchange (FX) trading system, and is now able to trade as a market maker for its clients. "LavaFX is a critical addition to Russell's expanding and diversifying FX trading capabilities," said Ian Battye, Russell's head of currency management. "Our clients, many of whom are buy-side managers, are generally price takers instead of price makers. LavaFX represents a different FX trading model than that used by most buy-side managers, but Russell anticipates this model to become more prevalent as electronic trading evolves." "By adopting the latest in electronic trading technologies, Russell is leading the charge amongst asset managers in recognizing the benefits of new technology in an ever changing industry," said David Ogg, head of LavaFX, Lava Trading Inc. David Ogg

Reuters releases upgrade to 3000 Xtra

Risk control, whether by pre-trade check or post trade margin monitoring, is paramount and the ForexManage solutions centre on these real-time calculations. Capital Forex Pro, the institutional arm of Capital Forex utilizes integrated deal capture with the available position-keeping and reporting, for platforms such as Currenex. “ForexManage took Capital Forex definitions and delivered an extensive client dealing experience. The system supports retail clients and money-managers with real-time position valuations of spot and forwards. Additionally, it compliments our institutional Currenex service with extensive live reporting and analytics” says Gavin Foster of Capital Forex.

Reuters has released a major upgrade to its flagship product Reuters 3000 Xtra (version 5.0)

Barclays Capital

introduces autoquoting up to 100 million across all majors on BARX

Following its successful launch earlier this year of Precision Pricing - pricing in tradable increments down to 1/10 of a pip - Barclays Capital’s award winning platform BARX for FX Trading continues to be committed to providing the fastest and most flexible executable pricing. This is evident in the recent introduction of

The key enhancements are as follows: • Simple, browser-based search to make it easier for customers to find what they need from Reuters broad range of content • MetaStock Premium graphics, which make sophisticated charting capabilities simple to use. New Quick Charts provide predefined, server driven, browser delivered and task-specific charts, simplifying previously complicated charting • New Fundamental and Reference data giving easy access to mutual funds from Lipper, institutional and stakeholder data from Factset, future events from Kalends and M&A content • Improvements to overall usability and customisation for better management of screen space e.g. ability to retrieve Templates from a drop down menu bar or put multiple objects into one frame on the screen. • Key improvements to the Reuters 3000 Xtra package to simplify and streamline the install, deployment and maintenance process.

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streaming rates up to 100 million across major currency pairs which are all executable in one mouse click. BARX for FX Trading also offers configurable pricing displays, rate calculators, quick deal panels and history graphs. For more information, visit www.barx.com/fx.


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news

Smart Trade releases STTP 4.0

Forex Capital Markets launches FXCM Pro Forex Capital Markets, LLC (FXCM), has announced the launch of FXCM Pro, its agency trading service aimed at middle market hedge funds and financial institutions.Leveraging over $100 billion in monthly trading volume, FXCM Pro gives clients access to global top-tier banks using its own lines of credit.

Providing the best in full service 24-hour agency execution desk, the FXCMPro suite features: • Multi Dealer Platform with Executable Streaming Prices • Anonymous agency execution • Deep Liquidity pool available to all customers • Leave Orders with their 24 hour full service desk • Proprietary Research and Analytics FXCM currently services over 50,000 active retail FX clients and more than 400 institutional clients.

Eurobase to supply SCB with Siena XML Gateway

Smart Trade Technologies has released STTP 4.0 of its multi-asset class trading and routing solution, offering clients even more improved performance and possibilities to build their new trading infrastructure. STTP 4.0 has more flexible matching algorithms that enable orders to be matched on multiple parameters (price, volatility, yield…) under user-defined matching criteria, and consequently offering more ways to define trading strategies as well as additional order types.

Pluggable Transport protocols can now be defined via dedicated plug-ins, sharply reducing the implementation time within the bank by leveraging existing infrastructures and middlewares. New GUIs have also been released for retail clients and FX including Options. The main benefits to banks using STTP 4.0 will be seen in terms of performance, flexibility, deployment, time-to-market, reduced integration costs, and improved personalisation.

Townsend Analytics expands FX offerings Software provider Townsend Analytics (TAL) is offering direct access to Saxo Bank’s spot Forex and metal products, through its RealTick trading platform.

Eurobase Banking Solutions has won a contract to supply Standard Chartered Bank with its Siena XML Gateway. The Gateway will be used at first to provide connectivity between the Bank’s in-house rates engine and the dealing interfaces, or portals, where end-users and intermediaries can deal with the Bank in a wide variety of currencies and products and will provide a generic connectivity infrastructure for the Bank’s trading and web marketplaces.

The Bank plans further automation of its foreign exchange liquidity management using the Gateway so that it offers pricing to corporate customers, financial institutions and other banks on the widest possible number of currencies and so that these customers are offered competitive rates even for non-standard currency pairs.

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The deal allows TAL to expand its foreign exchange offerings, and will mean that traders will get access to Saxo prices within a few weeks according to the Danish FX specialist. TAL said it is also enhancing the FX trading capabilities to give customers access to greater liquidity through RealTick. The software firm said the deal between the two companies was brought about by customer demand.


news

SuperDerivatives releases new version of SD-FX

FXDD rolls-out MetaTrader 4 FXDD, an online retail forex firm, has recently rolled-out the latest version of MetaTrader (MT4), a third party trading platform they offer free-of-charge in addition to their proprietary platform, FXDD Trader.

MT4 delivers a greatly improved look and feel and packs a powerful technology punch: extensive charting capabilities and trailing stops, faster execution and extensive black box functionality. Shawn Dilkes, Chief Technology Officer, FXDD, said: “We are dedicated to providing our clients with excellent technology and instant execution. Additionally, we provide consistent interbank pricing and liquidity allowing us to offer such tight spreads as 2pips on EUR/USD and USD/JPY and 3-pips on GBP/USD and USD/CHF.”

Currenex and Traiana offer STP for FX trades Traiana, Inc. and Currenex have integrated their platforms to automate and streamline order processing for prime brokers conducting foreign exchange trades on the Currenex execution platform. The complete straight-through-processing integration of Currenex’s platforms, the Traiana Harmony™ service and Traiana’s Trading Relationship Management (Traiana TRM™) software will bring additional speed and seamlessness to the trade process.

Prime brokers can now receive immediate, electronic Currenex deal confirmations via the Traiana Harmony message center, meaning they can more effectively manage total positions, and provide their buy-side clients with increased efficiencies, improved reporting and reduced operational risk.

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SuperDerivatives® has released a new, even more powerful version of its SD-FX™ pricing platform which now includes additional cutting-edge exotic foreign exchange (FX) options, such as multiperiod faders with knock-outs and accumulators, basket options and variance swaps. A correlation module has also been added, allowing the real-time calculation of correlation-dependent options.

The latest release includes many new tools for corporate users and fund managers. Among them are powerful risk management utilities, such as the volatility sensitivity analyzer. This lets portfolio-managers assess the potential exposure of their options portfolio to simultaneous changes in both the spot rate and implied volatility, based on real market prices. A new hedging Strategy Wizard has also been added; this automatically suggests effective strategies for hedging specific currency exposure, subject to parameters defined by users.

China Construction Bank joins ®TM the EBS trading community EBS®TM has signed China Construction Bank Corporation (CCB) as an EBS®TM Spot and EBS®TM Prime customer. As the latest Asian bank to sign up as both an EBS Spot and EBS Prime customer, the benefits to CCB include access to higher levels of liquidity and thus optimum prices in the most actively traded global currencies – the US dollar, Japanese yen, euro and Swiss franc (CHF). “Banks in China understand the need to join a global FX platform,” explained KC Lam, Head of Sales Asia Pacific, EBS. “EBS’ clients generate increased revenues through FX trading as they are able to directly enter the interbank FX market to access tighter pricing and global liquidity. China and its banks are an important part of our global offering.” The news means that KC Lam four of China’s biggest banks have now joined the EBS trading community – they are Agricultural Bank of China (ABC), Bank of Communications, China (BOCOM), China Construction Bank Corporation (CCB) and CITIC Industrial Bank of China (CITIC).


integral development corp.

worldwide state-of-the-art

u.s. patented technology

Welcome to next generation eFX. software & services internet

innovation in capital markets

enterprise java

e-business solutions To upgrade your eFX solution, contact eFX@integral.com or visit http://www.integral.com/eFX.

D U B L I N

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M O U N T A I N

V I E W

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Y O R K

S I N G A P O R E

T O K Y O

T O R O N T O


news

BNP Paribas launches customisable displays on FX Dealer

ABN AMRO launches electronic Swiss franc IRS ABN AMRO has launched electronic trading in Swiss francdenominated interest rate swaps, making it the first bank to offer this capability. Clients who wish to hedge their interest rate exposure have always been able to do so through voice execution, but Swiss franc interest rate swaps have remained voice-only while other products have become available through electronic platforms.

Switzerland, along with Italy, already makes up a substantial part of fixed income trading on Bloomberg, and electronic Swiss franc interest rate swap trading is a natural next step in the business-toclient area, comments Paul Humphrey, Global Head of Fixed Income eBusiness at ABN AMRO.

TraderTools introduces GLOBE™ TraderTools LLC has introduced Global Limit Order Book for the Enterprise - GLOBE, the first comprehensive global order book of its kind in the world. GLOBE facilitates the entry of orders into STPlatform via Order desk by a dealer or salesperson, Web interface by remote branches or Internet-based customers and API by systems generating orders electronically.

With GLOBE, banks, brokerages and other financial institutions benefit from increased: • Flexibility: The system can be changed as business requirements change • Performance: Robust and reliable platform synchronizes every part of the hierarchy and structure in real time • Security: Top-down policy determines access from one trading entity to another • Integration: Clearly-defined entry points to front-, middle and back-office and an open interface to any system.

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BNP Paribas has launched fully customisable live spot price displays on the FX Dealer portal. This latest enhancement to the functionality on the FX Dealer Portal will allow customers to not only select which currencies they want to view, but also how they view them. The full list of live tradable FX prices coming directly from BNP Paribas traders can be edited by the customer, so that they display only the currencies they require.

Alternatively, customers can specify to view rates by currency blocks, such as USD majors, Euro Crosses, Asia, Eastern Europe and Latin America. In addition to the live bid and ask rates, when detached in its own window, customers can format the display further by requesting additional information including the open, high, low and close, as well as the percentage change on the day. But, probably the most powerfully piece of functionality is the capability for customers to create and maintain their own list of cross rates, for which live prices are displayed.

GlobeOp to offer connectivity to Currenex GlobeOp Financial Services has announced an agreement to offer connectivity to the Currenex electronic fx trading platform via GoMarketssm, GlobeOp's new electronic trading connectivity platform for its hedge fund clients. GlobeOp's clients will now be able to access Currenex's multi-dealer electronic solution for fx trading. Through connectivity via GoMarkets, Currenex's participating market makers can expand their service to GlobeOp's hedge fund clients and a large and diversified buyside community, accounting for a significant share of the daily global foreign exchange market. Hans Hufschmid, chairman and chief executive officer of GlobeOp, said, "The addition of Currenex's e-FX trading platform to our GoMarkets service enables GlobeOp to offer its clients an industry-leading fx execution service with STP benefits. Increasingly, by adding quality partners such as Currenex, GlobeOp is growing to become strategically more important to our clients, who look to us for a broader range of hedge fund support solutions."

Hans Hufschmid


The TrackWheelÂŽ: An efficient visual interface for traders to quickly and intuitively adapt their pricing in real time. "Skew" commands are sent to the server side, allowing to integrate the Dealer's knowledge in the Price Stream.

Trade Blotter: Real-time market activity is reported at lightning speeds, even over remote networks. Trades can be marked-to-market for instant evaluation of counter-party profitability.

Admin Tool: Fine-grained but practical administration provides control to management at various levels of the firm. Market makers can access the parameters that affect their trading profitability.

To organise a demo please contact Gabor KORMOS or Franck MIKULECZ.

Alternatively please call a member of our professional technical sales teams in the following offices:

BAXTER-Solutions Kft. 1075 KĂĄroly krt. 1. Budapest, Hungary phone: +36 (1) 235 06 87 e-Mail: info@baxter-it.com

BAXTER-Solutions LLC 2116 3rd Street Santa Monica, CA 90405 USA

BAXTER Financial Services Ltd. Dublin Exchange Facility IFSC, Dublin 1 Ireland

phone: +1 (310) 399 00 93

phone: +353 (1) 670 04 55


news

Rabobank introduces online

Over 300 funds now settling through CLS Bank The number of funds settling payment instructions derived from foreign exchange deals through CLS Bank has now exceeded 300. Since launching its Enhanced Fund FX service, CLS Bank has seen a steady increase in the number of users.

service for Pension Fund Managers As of 1 January 2007, Pension Funds in The Netherlands are faced with a new set of regulations under the FTK (Financieel Toetsingskader or Financial Assessment Framework). These regulations force Pension Fund Managers to increase their focus on Assets and Liability Management. Within the FTK Framework, Collateral Management has been introduced to mitigate the credit risk between the Pension Fund and the Bank. It is a two-sided mechanism to minimise exposures stemming from long-dated transactions. Hereby both parties agree upfront to deliver cash, government or corporate bonds as collateral to minimise this risk.

Now fund managers, pension funds, hedge funds, investment funds and asset management divisions of banks are using CLS to settle payment instructions from foreign exchange deals relating to crossborder investment activity for 338 funds. Since the beginning of 2005, there has been a 445% increase in fund participation in CLS.

MIG Investments increases service offering at launch of new web design At the launch of its new web design, Switzerland based MIG Investments has introduced new margin conditions by giving its clients the opportunity to trade Forex with a leverage of 200:1. The companyâ&#x20AC;&#x2122;s margin conditions also include a no maintenance margin policy. This means no margin calls and no automatic closing of positions during weekdays, hereby giving the clients more flexibility in their trading. MIG also provides a special Mobile

In preparation for this development, Rabobank has introduced an online service for Pension Fund Managers called the Collateral Management Tool (CMT). The CMT, accessible via Rabobankâ&#x20AC;&#x2122;s TreasuryWeb website, offers the ultimate support function for a Pension Fund. It features online information, access and valuation of posted collateral and the mark-to-market of the underlying transactions on a day-by-day base. For more information visit www.rabotreasuryweb.com

FXall daily trading volumes surpass $43 billion FXall has announced that daily trading volumes have broken through $43 billion. The rise in volumes has been driven by increased activity across all FXall's client segments - active traders, asset managers, corporations, banks and broker-dealers - as new clients sign up and existing ones increase the volumes they execute on FXall.

Trading service that allows clients to view real time prices, charts, account information and even trade using their PDA. MIG Investments is already offering tight spreads on 20 currency pairs and on Spot Gold and Silver, with 3 pip spreads on six pairs.

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Philip Weisberg, CEO, FXall, said: "FXall's record volumes are proof of our success in meeting the diverse needs of clients across the institutional foreign exchange marketplace. Our end-to-end workflow and automation services have been as important as our trading services in winning new business. Thanks to the diversity of our client base, we have been able to sustain strong and steady growth despite cyclical fluctuations in trading activity by individual market segments.

Philip Weisberg


See the future Rabobank International, Global Financial Markets

Rabobank offers the solidarity and security of an AAA credit rating Rabobank provides a global commercialism founded on a tradition of co-operation, knowledge and customer focus. Rabobanks’ Global Financial Markets has significant research capabilities and our FX forecasting track record is impressive as evidenced by consistently ranking in the top of all banks surveyed by FX Week*

* FX Week, August 15, 2005

www.rabobank.com

Challenging convention Our aims are to create opportunities for you, search for fresh alternatives and realize new possibilities by anticipating change and taking the initiative. By looking at common things in an uncommon way, we try to find fresh angles. Success is about doing common things uncommonly well – and success is what we want to create for your business.


news

Swedbank launches FX Trade

WSS provides remote web salesperson facility

Swedbank has launched FX Trade – a fully flexible foreign exchange platform with the newest generation, high security logon solution.

The latest release of The Wall Street System provides support for the remote web salesperson that is trading over the Internet on behalf of his customers. The system enables the web salesperson to adjust the trade rate and/or margin on the trade and determine the margin P&L that will be earned on the trade.

The web salesperson can override a credit or trade size limit condition and also can easily trade on behalf of any counterparty in the system that has been set for Internet trading. If a remote salesperson is dealing on behalf of a customer and breaks a limit, the system will inform the salesperson by displaying each of the reasons prior to computing a price. The remote salesperson can override the condition and enter a comment, which is stamped on the trade.

Gain Capital releases enhanced FOREXTrader platform

With tailor-made customer screens, including the possibility of displaying a wide variety of indicative rates, streaming prices and one-click trading, the system suits all kinds of customers, from fund managers with multiple legal entities to corporates and proprietary traders. Various trade reports and a possibility of downloading trade data into clients own systems facilitate the administrative work. fxtrade@swedbank.com

TradingScreen launches TradeFX TradingScreen Inc.has announced the launch of TradeFX, its MultiLiquidity pool FX Trading Module. TradeFX simplifies foreign exchange trading by aggregating financial information from multiple assets and brokers on one integrated user platform.

GAIN Capital Group, Inc. has announced a new release of its proprietary forex trading platform, FOREXTrader. New functionality for FOREXTrader includes enhanced charting and technical analysis capabilities and marks the launch of Forex Insider, the newest addition to GAIN’s proprietary research offering. Forex Insider provides clients and registered users with actionable intraday analysis of news, events and technical levels that impact currency prices.

Forex Insider updates are published directly on the platform by senior traders and members of GAIN’s research team, up to 20 times per hour. The updates provide alerts on current technical developments, insights about major market flows, and timely analysis of economic data releases with GAIN’s reaction to comments by government officials.

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With TradeFX, end users can conduct transactions across the full spectrum of FX electronic trading models and venues, including Full Streaming (FS), Request for Stream (RFS) and Request for Quote (RFQ). This solution enables customers to trade FX as an asset class effectively and simply at a click of a mouse without complex integration across platforms and provides them with the ability to view consolidated quotes, including Spot, Forwards and Swaps, across multiple banks and liquidity systems. TradingScreen’s clients also have the ability to trade Global Equities, Options, Warrants, Exchange Traded Funds, Convertible Bonds and Listed Derivatives on the same platform.


Swedbank - a qualified banking partner.

Corporate Bank of the Year in Sweden 2003, 2004 and 2005 Source: Finansbarometern by Aff채rsv채rlden

Swedbank


Foreword

This time we have been lucky!

This time we have been lucky!

I

n our financial industry we are often challenged by events. Last time I wrote about the July 7 events in London and the resilience of our professionals and community at large. And indeed, the numerous events that have rocked the financial worldwide system have provided improvements in the way we deal with external events. As former Federal Reserve official Gerald Corrigan reported in a banksponsored post-mortem on LTCM, improvements in the financial worlds handle on market and credit risks are noticeable. However, operational risks resulting from the rapid rise in the use of credit derivatives and other financial innovations since LTCM’s fall could spiral out of control. This year the market absorbed the down grading of General Motors and Ford without too much fuss. The ISDA June 2005 survey cited important advances. Although only 40% of credit-derivative contracts are now confirmed by automated systems, up from 24 % a year ago, it is still less than half. And then Refco came. This firm that went public only a little while ago disappeared in a very short time. So what went wrong?

CPSS-IOSCO has published standards for CCP’s (central counterparties) which, in Europe will be adopted by ESCB/CESR. Consultations are currently under way and various associations will respond to this call for input. Some banks provide 3rd party clearing, in other words, open their books and provide their own name on behalf of others. The risk between the client base and the 3rd party provider can become that big that limits on total turnover might be considered. CLS bank, avoiding the payment versus payment risk, or Herstad Risk, also provides opportunities to use 3rd party clearing. Smaller banks and customers don’t need direct participation to CLS bank, as some banks have created a big business in providing this service. So far the sponsoring banks of CLS Bank need to see a return on the investment they made. Neither the regulators nor Central Banks have come forward with full endorsement or compensating with less capital requirements or higher for the nonparticipants. So have we covered all angles, do we understand what really goes on?

Access to the financial markets is crucial for many, not the least of course, banks. We need to serve our client base with an instant access to all currency zones and all products and the focus of the major players has widened from the pure FX and MMKT business. Some major industry players in the markets have created their own banks in order to have direct access to this increasingly electronic market place. This has not gone unnoticed by other players in the markets, in particular the hedge fund industry. The challenge for many of these largely unregulated market participants is to get access to these professional systems. Smaller banks and specialised trading houses also want to get access so they in turn can serve their client base better. As a consequence the range of clients having an indirect access to financial products has never been greater.

In the particular case of Refco, as an example, direct access was given to the FICC (CCP clearing in the US). When LCH became popular on this side of the Atlantic, Refco was also given direct access to the CCP in Europe thus opening opportunities for cash bond and repo trading. This opened opportunity for the client base of Refco to get access to markets that would be rather difficult in other circumstances. Although evidence tells me that some banks refused to trade directly with Refco as a counterparty, indirectly through the anonymous trading opportunities via the CCP function, they nevertheless provided access to the liquidity in the various products on offer. In other words, all direct participants in the CCP’s had unwitting risk on Refco.

One hurdle remains, the link. Anonymous trading is a must and the emergence of Central Counterparty Clearing in the last few years has provided opportunities for anonymous trading.

Reputational risk. No matter how we built risk management techniques, the human factor remains extremely important. Operational risk. This short article shows that you cannot cater for all events.

22

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The unwinding of many outstanding trades in FX, Futures, Bonds, Options hide the real problem. What if not enough margin was available to make this unwinding possible. We all know that some investors have lost a great deal of money, money they invested because of the high reputation of this firm. But what if the money had run out, how would we have coped with the unwinding. Infrastructure risk. We as a market fail to understand the importance of the infrastructure we deal with. Not many really understand all the nuts and bolds on which our industry is built. Concentration risk. The amounts going into each CCP is absolutely huge and so it should be. However, the various actors channelling liquidity into this unique pipe should realise that when things go wrong, everybody could be affected. The reputation, operational, infrastructure and concentration risks, among credit risk need to be our focus in the future. Markets are much faster and it is up to the markets to make sure they understand the various risks attached to new evolutions. This time we have been lucky. Next time it might be too late.

So what are the lessons we haven’t learned so far from this case?

Godfried De Vidts President, ACI


Efficiency, control, compliance – with FXall we get them all.

“Reconciling our forex positions

used to take a day. It now takes an hour. FXall delivered a solution that gives us better control of exposure and risk. We have fully automated trading with account allocation at the touch of a button. With QuickConnect™, it talks seamlessly with Oracle Treasury, making compliance much easier. Using FXall with Oracle applications has given us a significant boost in efficiency.” Geri Westphal Vice President – Assistant Treasurer Oracle Corporation

FXall, QuickConnect and all associated logos, are the trademarks of FX Alliance LLC. FX Alliance Limited, regulated by FSA.

www.fxall.com


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LEADER

What’s a customer?

Electronic FX converging the Buy and Sell side Historically, Foreign exchange, almost certainly the oldest financial business, was organized around three types of players: Clients carrying underlying FX exposure, Banks providing prices and credit to these Clients and Inter Dealer Brokers (IDB) insuring information flow among Banks and matching of the banks interest. This structure, traditional in OTC capital markets, has been eroding quickly in the last few years and has been replaced, practically if not officially, by a new market structure that integrates the technology advances of E-FX and better answers the new requirements of the market participants. This new structure, described below, drastically modifies the market by reorganizing it around three key competences: Liquidity provider, Credit provider and System provider. Philippe Buhannic, CEO of TradingScreen his evolution has fundamentally affected the traditional

T

This phenomenon of “market interna-lization”, traditionally

definition and role of Buy side and Sell side players. Some

performed by banks, is now becoming center stage and open to

players, such as very large hedge funds, have the know-how

third parties. At the same time the privilege of information and

today considering many of them were former bank traders. They

access to interbank pricing that banks enjoyed historically has

also have capital (through leverage) and risk limits that are

eroded as clients now can access EBS prices for instance. Finally,

sometimes even larger than banks, allowing them to become

to the one to one credit relationship maintained by the Buy side

significant liquidity providers if they choose to do so. Even more

with its FX counterparts originally has succeeded a multi lateral

important than when they look for liquidity is where do they look

organization of the settlement process. A Buy side will trade with

for liquidity? Nowadays, it is not always directly with banks.

one liquidity provider and settle through a prime broker, which

Anonymous venues have started to normalize participants as

will potentially cross collateralize its FX risk after netting with

“destinations” and chances are the Buy side will be matched with

other financial instrument positions. A market structure based on

another Buy side on these venues.

regulatory and historical definition has succeeded a market structure built around three key functions that are assumed at different time by different players indiscriminately. What are the technology trends that have provided the framework for this Buy-side/Sell-side role convergence? We can distinguish three main ones: 1. A revolution in the gathering and distribution of transactional information

The FX market has started its revolution. As always in times of revolution the innovation rate increases enormously, then a restructuration takes places taking the best of the old system and the new one to create a new level of efficiency. This is where we are today. If we follow the electronic trading experience curve, FX made its revolution after the Equity market and is converging in many ways towards the same model while keeping some of its more unique characteristics, such as its enormous, globally distributed liquidity pool. The key drivers behind this new transactional efficiency have been the introduction of first

26

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>>>

generation platforms (FXAll, Currenex, etc) simplifying access to the traditional counterparts followed shortly by anonymous liquidity enhancing platforms (HotSpot FX, Lava, EBS, etc) all based on a concentration of the liquidity in one single system. The current drivers: progressive establishment of the FIX protocol in FX and development of cross asset class platforms like TradingScreen, are moving the market towards a multi lateral aggregation of liquidity by using the global networks that have been established over the last years. These new approaches have normalized the market across Buy side and Sell side in terms of access to information and speed of execution, making strategy building and execution as efficient for both sides of the market. The FX market, historically one of the most efficient OTC markets, thanks to these new approaches, has advanced even further in terms of transparency, information distribution and operational efficiency. 2. A progressive reorganization of liquidity

Liquidity was historically one sided, provided exclusively by the Sell side and backed mainly by capital. The liquidity today is getting ruptured in various pools that are competing for the client’s interest and can be generated by capital as well as technology to a certain extent. Liquidity today is offered by Banks but also inter dealer brokers (EBS), anonymous platforms (Lava, Hotspot FX), Listed Derivatives Markets (Globex), and in some cases by access platforms (Currenex, FXAll). All these venues can now be accessed in a fraction of a second with the same interface and are de facto aggregated. On the other side of the market more and more clients are building algorithmic engines that are “listening” real time to the market and effectively give or take liquidity from the market but also arbitrage prices imposing a strong discipline on the various electronic pricing systems. Some of these client-developed systems are becoming quickly a significant source of liquidity but they also make the liquidity equation that much more complex. At the same time the traditional internalization of flows that was done by banks across their client base has been now amplified by a growing internalization of flows by some platforms, especially in the retail sector, adding yet another rupture to the centralization of liquidity. To have a view of the future in that area it is interesting to look at markets where “market impact’ is important,

such

as

the

equity

market.

The

successful

development of Alternative Trading systems like Liquidnet,

january 2006

e-FOREX

27


LEADER What’s a customer? Electronic FX converging the Buy and Sell

organizing large trades between the Buy side players, shows

the establishment of a more global view of banking

that it is not far fetched to think that the same market

relationship by the Buy side, more entangled in the entire

organization could have some application in the FX market and

activity of the client and less specific to the FX activity. This has

would have a major impact on liquidity by creating just another

reallocated the credit issue between the executing counterpart

separate pool to access.

(Bank or platform), the credit supplier (Bank or Prime Broker) but also the client, which can manage its activity through

The liquidity chase is therefore more vital than ever in the FX

gearing, and correlations to better use its capital. This is a far

market. Finally, another important element when analyzing

cry from the traditional one-way street that credit constituted in

liquidity is that today the liquidity is accessible

the past in the FX market.

progressively by all players due to the decreasing costs of transaction technology and the

Conclusions

numerous credit enhancement facilities that

The role of the Buy side and Sell side will

are prevalent in the new model. In

inevitably blur further in the future as

summary, both the Buy side and Sell

these evolutions reach maturity. The

side are faced with the same growing

FX market will eventually follow the

need for liquidity aggregation, but in

main model of the future for most

this new market configuration there

financial instruments whereby a

is less of the traditional two tiered

network

access system.

destinations or participants will

of

loosely

defined

become the market and where 3. A reallocation of the credit

liquidity will be split across a

function

wider number of participants.

Credit was perhaps the single

Automats will permanently scan

largest limiting factor to the

this liquidity and its patterns and

universal access to the FX market,

algorithmic trading will take

as counterparts historically worked

advantage of any opportunity

together based on a reciprocal

while optimizing the “market

recognition

system

reducing

impact” of trades. This will imply a

leverage and trading. Credit was

reduction of the trade size, a

highly concentrated in the banks

multiplication of the volume and a

balance sheet and only the most credit

greater specialization of the players on

worthy counterparts could access the

one or more of the three key functions:

market. Among the main factors which have

Liquidity provider, Credit provider and

structurally modified the credit issue in the FX

System provider.

markets are risk reducing strategies such as netting and improved settlement risk management.

Players that are judged by the market, as not bringing any value added through one at least of these three elements

But the main revolution has been the advent of multi lateral

will be marginalized. As electronic access gets cheaper and

execution combined with centralized clearing though a prime

easier in the future, platforms will have to justify their role in

broker. This added to margining capability and cross

liquidity gathering or back- end processing. As margining

collateralization across asset classes has allowed very active

systems makes control of risk limits easier and less capital

new entrants to the markets like alternative asset managers to

intensive, credit providers will have to justify in a more

enjoy an almost unlimited access to the market by delegating

exacting manner their superior processing and credit

credit management to a few key Prime Brokers that had the

enhancement capability. System providers will have to bring

technology to offer this service. Technology has allowed players

real benefits in terms of access, speed and strategy creation to

to effectively split each FX transaction into a credit based

retain the client interest. All the components of the future of the

operation and a trading operation if they wished to do so. This

FX market are almost certainly contained in these ideas, which

allowed a specialization of the “fittest’ participant, building on

are reaching out to other asset classes. The traditional

each players’ strengths (Market Making, Credit, Operations, etc)

separation between Buy side and Sell side will progressively

for the greater efficiency and overall good of the market.

give way, through specialization and automation, to a trading

Furthermore the credit decision for FX has become, with the

world where every player is the Sell side of some and the Buy

development of portfolio risk calculation (Span, VAR, etc) and

side of others.

28

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Risky Business: Improving Risk Management Strategies in the Online FX Environment Online FX trading is becoming an increasingly popular option for financial institutions, corporates, fund managers, hedge funds and so on. As the variety of players in the market grows, and the speed of transactions becomes quicker (influenced by new streaming technologies), the strategies and systems developed to cope with the RFQ environment are starting to show their age. Paul Ronan, Managing Practitioner, City Practitioners, considers some of the credit and market risks faced by banks in the rapidly evolving online FX environment and suggests ways in which these challenges can best be met. Paul Ronan

New Buy-side Players

Online FX trading has attracted a range of new buy-side players, with hedge funds, in particular, playing a powerful role in shaping the market. These new buy-side entrants are demanding but at the same time, often lack technological infrastructure, creating connectivity issues. Critically for sell-side providers, some buyside players are beginning to employ

Credit Risk

exhausted but an overall credit limit

The impact of streaming technology on

underutilized,

credit risk can be clearly seen. In the past,

manual reallocations of credit.

strategies, aimed at exploiting pricing inefficiencies in the anonymous markets. Streaming Technologies

The pace of change in the online FX environment is also being driven by STP and SER services. This is having a profound effect as streaming architectures

electronic FX portal, a seller usually

The increasing speeds of transactions,

imposed a carve-out limit. This was known

however, mean that credit check needs

to be an inefficient use of credit but

are now shifting from pre-deal to post-

considered acceptable whilst the volume

deal, creating a challenge for existing

of online clients was relatively low.

credit systems. To date, credit systems have played a largely passive role in the

“The increasing speeds of transactions, however, mean that credit check needs are now shifting from pre-deal to post-deal”

demands

for

credit-related

information.

With the traditional RFQ model, no problem

arose,

as

pre-deal

credit

checking could be factored into the price discovery. However, as the pressure has

that

customer

have

discovery, frequently occurring towards

electronic

now significantly faster.

increased, a carve-out limit might be

trading

coverage

checking has become parallel to the price

Now

environment. Crucially, transactions are

e-FOREX

traders’

and

ensure a risk free, one-click trading

january 2006

trading cycle, providing a response to

increased on RFQ response times, credit

require more control points in order to

30

highly

during the “onboarding” of a client to an

sophisticated trading technologies (e.g. algorithmic trading) as well as aggressive

necessitating

channels

the end of the discovery cycle.


<AD76AB6G@:IHq :L

Shifting credit checking from pre to post-deal has a further impact: the outcome ofthe credit check determines whether price streaming needs to be altered for the client, either halted or widened according to line usage policy. This in itself creates a tension for sell-side players as, while prices are streamed to clients at sub-second speeds, (via an increasingly wide range of platforms such as proprietary web portals, Currenex ESP and API trading) the streaming controls available to service providers are very often manual.

In order to minimise exposure to credit risk and prevent loss of trade (i.e. through delays in credit checking),

credit

systems

must

become

more

aggressive as well as more closely coupled to the trading system, thus forming a very active point in the trading

cycle.

This,

however,

entails

a

major



4CTff\bagbCXeYbe`"

architectural change as systems must be adapted to publish

a

continuous

stream

of

credit-related

information to trading systems (“publish subscribe”), at ever greater speeds and volumes.

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Risky Business: Improving Risk Management Strategies in the Online FX Environment

Market Risks: Regulatory Drivers

The EU Markets in Financial Instruments Directive (MIFID) has not yet come into play but when it does so, it could well impact electronic platforms and certain brokers (“systematic internalisers”) as these firms must, pre-trade, “publish a firm quote in those shares admitted to

“Not surprisingly, sellers’ worst nightmare is the creation of a liquidity bubble”

trading on a regulated market”, “on a regular and continuous basis during normal trading hours” and, post-trading, “make public the volume and price of those transactions and the time at which they were concluded”.

netting and trading strategy engines

Liquidity Bubbles

The

between the e-commerce flow and the

implementation

of

streaming

environment towards an order driven one price can result in multiple hits, anticipating the volume of demand is not

to real-time as possible …in a manner

always easy. Not surprisingly, sellers’

which is easily accessible to other market

worst nightmare is the creation of a

participants”. The Directive’s transparency

liquidity bubble.

requirements will put pressure on banks to aggregate, publish and archive far greater

This fear also places pressure on auto

amounts of information than ever before,

quoting

creating

those

mechanisms. For sellers using anonymous

institutions that fail to manage trade-

streaming channels, a strong sense of

related data efficiently.

market depth is required, if this aspect of

significant

risks

for

inter bank market.

technologies is moving the FX online market, creating fresh risk for banks. As

Information must “be made public as close

This will allow banks to implement

engines

and

their

control

“Efficient and often speedy hedging in the interbank market is required. Any latency or slow visibility of trades on the blotter constitutes a risk.” Reducing risk

In summary, to improve risk management

market risk is to be avoided.

within these markets, two key areas

Other Market Risks: Data latency

should be focussed on. Firstly, risk

In the world of online FX trading,

The Interbank Market

delivering data at high speed is a key

The increasing speed of trade flows from

greater integration to provide credit risk

ingredient to a successful service. Indeed,

e-commerce portals also, inevitably,

controls. Secondly, in an increasingly

delivering the right information to buyers

affects the service provider’s relationship

anonymous and rapid market, building

at the right time can often decide whether

with the interbank market. Efficient and

bridges between customer flow portals

a seller makes a profit or loses money.

often speedy hedging in the interbank

and the interbank channels becomes a

Data latency can result in arbitrage

market is required. Any latency or slow

necessity, in order to facilitate efficient

opportunities,

visibility

hedging. To a certain extent, the FX

as

a

client

spots

a

difference between the price offered by a

of

trades

marketing and trading systems need

on

the

blotter

constitutes a risk.

market also chases the sophistication and

bank and one of its competitors, and takes

transparency of sister markets, Fixed

advantage of the mismatch. Clearly,

The vendors in the interbank market have

Income and Equities. Much can be learnt

highly efficient pricing engines are a

recognised

from the systems and business strategies

must, if sellers are to avoid this trap.

terminals with API’s.

32

january 2006

e-FOREX

this

and

are

replacing

that have evolved within these sectors.


IFX Direct – a tried and tested FX trading solution

IFX Direct is a reliable, fast and accurate trading platform for all a client’s foreign exchange decisions. It is unique in putting EFP trading side-by-side with spot forex on one single screen.

In normal market conditions there is no dealer intervention; the system provides transparent liquidity combined with a sophisticated order-management system which can cope with complex orders such as contingents, OCOs, stop-loss and GTCs, which can be filled, settled and reported back instantly. This tried and tested forex trading platform from IFX Markets can be delivered to clients in three different ways, to provide whatever trading environment the client requires. The basic method allows clients to trade through the platform direct with IFX’s dealers, with straight through processing (STP) which can be delivered in a variety of formats from emails, through to file transfer protocol (FTP). The second method is as a White Label, which is aimed at IBs, FCMs and other client-facing institutions. It is branded with the logo of the institution. The institution itself is able to dictate its own spread and commissions with the end-user.

The API can be used in a variety of ways. At its most basic it is a price feed; but it can also be linked to third-party trading platforms, multi-bank portals, or automated trading systems (black-box) to name just a few. IFX can tailor these solutions to each institution, and can simultaneously offer more than one of them to a single entity.

For further information please contact: IFX Markets Ltd One America Square, 17 Crosswall London EC3N 2LB United Kingdom Telephone: +44 20 7892 0909 Fax: +44 20 7488 9326 Authorised and regulated by the Financial Services Authority

Thirdly, the Application Programming Interface (API) enables a third-party software system to be “plugged-in” at the front-end of the trading platform. Positions can be auto-offset, or the institution can use the IFX price engine, just as a feed.

Sponsored Statement january 2006

e-FOREX

33


E-FX: on the way to meeting the needs of the middle-market It used to be that the largest corporations got the most attention, but middle-market companies are now suddenly and pleasingly finding themselves courted for their growth potential. At the same time, web technology is providing the opportunity to deliver the sort of services and functionality that this market segment needs, at the right price. Mid market companies can go to the ball. Andrew Kidd, head of e-clients development, Europe, ABN AMRO andrew.kidd@uk.abnamro.com ig enough to make an impact, small

B

In fact, when it comes to FX, mid-market

enough to have room to grow, today’s

companies have definitely been cast in the

middle-market companies are the raw

role of Cinderella in the past. With largely

material for tomorrow’s global giants.

operational FX requirements to meet and

Providers, including IT suppliers and

smaller tickets, they were relatively

financial services companies, understand

expensive to service – and sometimes got

this and are increasingly targeting this

rather poor service as a result.

sector of the market. That was then, but a quiet revolution has Although

often

entrepreneurial

in

business outlook, mid market companies can appear conservative when it comes to adopting new technology and new working practices. This is frequently a resource issue: expenditure on systems

been taking place. While the move to e-FX trading was aimed at professional traders

“multi-banking is less of a draw for mid-market companies because they tend to have fewer banking partners and credit lines” The ability to connect to multiple trading partners via the web has been much

and large corporations rather than mid-

hyped as the ultimate end-destination of

market users, once introduced to the

e-FX; this is the model for portals such as

services, mid-market companies have

Currenex and FXall.

and advisory services will usually be

taken them up with alacrity. ABN AMRO’s

modest, and finance teams are also more

middle market clients are today trading

This may be attractive to the most active

thinly

mid-tier

some 65% of their FX tickets online – a

corporate FX users (earlier this year,

company1 probably does not employ a

migration that has taken place over the

independent research2 conducted on

full-time FX trader, and is unlikely to run

last three years. In the mid market sector,

behalf of ABN AMRO with (mostly larger)

separate treasury and finance functions,

we expect the use of e-FX to rise to around

companies in Europe and the US found

or have access to high-end treasury

80% of all tickets over the next 18 months.

41% using multi-bank e-commerce FX

spread.

The

typical

solutions).

management software. Developing the model

“when it comes to FX, mid-market companies have definitely been cast in the role of Cinderella in the past.” 1

E-FX has lowered trading costs for the banks and created efficiencies for their clients. Market competition and the advent of freely available, up-to-theminute indicative pricing has increased transparency and levelled the playing field somewhat for smaller participants.

Defined here as a company with a turnover of between 50 and 100 million euros

2

BDRC on behalf of ABN AMRO. Interviews were conducted with global and regional treasurers of 101 multinational companies in Europe and the US.

34

january 2006

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>>>

Yet multi-banking is less of a draw for mid-market companies because they tend to have fewer banking partners and credit lines, and fewer and more operational (as opposed to treasury) FX needs. Mid-market companies generally also do not require a wide range of FX products. When ABN AMRO researched this market some three years ago, there was little appetite for FX options and the like. So â&#x20AC;&#x201C; in addition to more competitive pricing â&#x20AC;&#x201C; what do mid-market companies like about e-FX, and how would they like to see these services developing? Convenience, integration, customisation

While

larger

companies

typically

concentrate trading in a central treasury, mid market companies are more likely to have a distributed treasury model. For these local finance officers, who often cover a wide range of tasks, convenience and integration are key. So, a competitive price automatically quoted and visible onscreen to accept or reject, without the need to phone a dealing desk, is welcome.

january 2006

e-FOREX

35


E-FX: on the way to meeting the needs of the middle-market So too is FX pricing when it is presented as one step in the process of making a cross border payment, or initiating a cross border sweep for liquidity management purposes. “Embedded” FX pricing can be triggered for transactions/sweeps over certain

configurable

limits

(with

transactions below that limit being automatically converted). Respondents to the BDRC study agreed automated FX sweeps would help eliminate less active currencies and reduce the number of under-used bank accounts required. Managing FX at a transaction level will also be invaluable when it comes to demonstrating hedge effectiveness within IAS 39. And having all confirmations and reporting available in one environment for different business views, customisable by the user for the user, will greatly enhance efficiency. A single sign-on environment, that allows

Lean finance teams need flexible systems,

Integrated reporting that covers FX

an individual to access FX services from

so the ability to customise e-FX platforms

trading independent of the channel used

whatever point in a transaction, or from a

is also important to users. For example, In

to initiate the transactions adds further to

business “view” (for example, from a

order to ensure proper segregation of

the flexibility, as it allows companies to

trade, cash or investment management

maintain a comprehensive view of their

perspective), makes all this achievable

positions and still occasionally trade in

and this functionality is available now in

more advanced or exotic FX instruments

the latest integrated

than those typically offered online.

(such as ABN AMRO’s Access Online).

banking platforms

duties

without

creating

operating

difficulties, it may be convenient to have second signatories at a remote location, or to set variable trading limits and/or alerts, in addition to establishing discrete security profiles for different users. Looking ahead

Although integrated e-platforms, such as described above, are available in the market, they are by no means pervasive yet. This is an evolution, not a revolution underway, but the gradual adoption of this approach to managing FX will deliver real incremental benefits to users. Looking a little further ahead, we expect to see the model developed further to provide co-mingling of pricing and trading capabilities from a user’s chosen trading partners. This so-called “consolidator” approach is already gathering users in the retail banking environment for personal account management, where a lead provider collects and delivers third party information through a preferred front end. ABN AMRO's Chris Gonzalez and Jarno Zange also contributed to this article.

36

january 2006

e-FOREX


>>>

eFX - Unifying the Front and Middle office environments The progress made since the elimination of manual tickets continues to drive front office procedures forward as truly efficient STP is sought for all trading venues. Manual input of trade information is gradually being eliminated. Electronic deal capture has been achieved, albeit at a high cost, often each feed being built and deployed separately to cope with its particular characteristics. This type of platform is a completely

downstream systems from vendor changes

different

feed

and facilitates common front and middle

handling solutions in that the system

office processes for all venues. The range

‘understands’ the deal payload in the

of dealing venues has grown as follows:

animal

to

traditional

messages and the capability of the downstream trading systems, then uses business logic, rules engines and very fast software to create a single low latency

Internal Deals

There

was

and

always

will

be

a

proportion of internal deals that need to

blow-by-blow virtual feed of all deal

be captured directly into a deal-entry

negotiation traffic for all venues.

screen within the trading system. Internal deals will sometimes be used to move

Peter Kriskinans, MD of Option Computers

A

unified

approach

that

Resistance to this approach often comes

positions from one system to another or

from a fear of the risk involved in

from one location to another. A high

changing such a critical part of the

speed intuitive user interface is essential.

captures

system. However, once accomplished,

multiple feeds (rates, pre-trade and

banks see a massive reduction in the

Telephone Deals

post-trade) from all FX trading venues and

effort required to introduce new trading

Historically, trades have often been priced

presents ‘virtual’ feeds to the various bank

venues, trading models and new business

and

systems has been available for some time.

functionality as this approach isolates the

transcribed onto deal slips and then

38

january 2006

e-FOREX

executed

over

the

telephone,


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>>>

eFX - Unifying the Front and Middle office environments manually entered into the FX trading

First on the scene were single-bank

system by a trader or a clerk at some

customer

convenient point.

customer portals such as FXConnect,

Voice trading with

and

portals Currenex

and

multi-bank

followed

more

desk trading. High frequency trading requires a low latency end-to-end platform, market risk management and STP. This is often the catalyst for upgrading to a hardened STP capable platform.

brokers still continues and represents a

FXall

meaningful proportion of daily trading

recently by HotspotFX, Lava, ESpeed and

activity. Automated deal capture is

Bloomberg. Customers tend to request a

possible using broker supplied interfaces

dealable price (RFQ) or are provided with

Unified approach available today

like Direct Deal Notification (DDN) that

streaming dealable prices from provider

take the deal entered by the broker and

banks and then click to deal.

With the number of touch points between bank and counterparties increasing with eFX portals it is of considerable value to understand the entire flow of data, not just the confirmed deal ticket. The ticket is the final outcome of all interactions. In addition to the ticket, a mine of interaction data is available from each Reuters, EBS, DDN, single bank and multi-bank portal connection.

pass this across to the bank. These trading venues require more

“Over the past five years we have seen the arrival of a plethora of new and radically different eCommerce channels for FX.”

complex trading API connections for the provision of streaming liquidity on a pervenue or per-customer basis, the collection of ticket data and the exchange of post trade amendments, credit and static data. These portal API’s then need to be integrated to multiple bank systems such as real-time pricing systems to provide the customised bid and ask price, real-time credit utilisation systems, real-time dealer

Inter-bank Market

intervention systems to redirect exceptions

With the introduction of the electronic

to a physical trader and gateways to

inter-bank markets using Reuters Dealing

provide STP to the customer.

Direct, Reuters Dealing Matching and EBS Spot Matching systems, the provision of

Prime Brokerage and STP on the buy side

prices became much easier and quicker, and trade volumes increased to the point that some form of automatic deal entry became a necessity. The main business incentives for automated deal capture are increased

trade

accuracy,

integral

customer credit utilisation maintenance, timely update of trading positions and trading profit and loss accounts, and predictable

system

operation

under

stressful market conditions. As early trading systems could become very slow

The new landscape also demands that banks address increasingly sophisticated and demanding buy side customers in a highly competitive arena, and they must therefore consider what additional issues are raised beyond simply supplying a prime brokerage arrangement or bank trading platform. Some venues are addressing this issue by implementing Prime Brokerage over the existing venues such as EBS Prime. Others venues like HotspotFXi can provide specific Prime Brokerage API’s that can be

under peak load, many traders would still

used to divert all trades executed on

have to maintain manual positions in

HotspotFXi which are required to be given

order to perform their job.

up to the Prime Broker. Algorithmic Trading

Over the past five years we have seen the

Banks are now using black box trading

arrival of a plethora of new and radically

capabilities for both customer solutions

different eCommerce channels for FX.

and for their own proprietary and spot

january 2006

e-FOREX

The advanced information flow available as a result of harnessing these flows includes operations such as observing: • clients or black boxes logging on/off a liquidity venue; • incoming RFQ’s; • outgoing price streams; • black box prices; • prime broker give-ups;

eFX Multiple Channels

40

This data is usually of a different shape for each venue and is supplied through a different API. However, once it is normalised in real-time using a broker neutral ‘deal hub’ system, this data can extensively simplify flow management, algorithmic trading models, subsequent downstream integration, and serve as a source of customer relationship data. This new generation of ultra low latency systems shred, analyse, aggregate, assimilate and distribute many thousands of interactions per second, building instant archives of data that allow banks to overview across multiple feeds in real time.

• simultaneous pricing different venues;

requests

via

• client requests awaiting manual intervention or credit approval;


Global Solutions, Locally Applied

By combining global reach and local understanding BNP Paribas delivers a tailor-made service for our clients in foreign exchange. BNP Paribas London Branch is authorised by CECEI and AMF and is regulated by the Financial Services Authority for the conduct of its investment business in the United Kingdom.

The bank for a changing world


eFX - Unifying the Front and Middle office environments Build or Buy?

Banks have very skilled IT staff and can construct similar systems, given enough time and adequate budget, but given the large number of venues and API’s this is an endless task that requires domain knowledge, near constant updating and does not really add value to the bank. To help reduce risk, banks must choose a vendor able to demonstrate existing support for all the FX venues they may require, understand the bank’s trading system interfaces and have proven strong banking transaction knowledge. Any solution should be expected to provide demonstrable continuous high throughput, low latency, ultra-reliability; redundant configurations; have 24 x 7 support, and most importantly vendor systems should have solid reference customers at a similar size bank.

This information can be used to build up a complete picture of activity on a per customer session basis enabling the bank to understand the trading behaviour of

local level, and for the bank to benefit from seeing all its chosen information configured at a front office, middle office, compliance or management level.

the client or counterparty; how much time is spent servicing each client; why clients

Common trading floor and Middle Office

are dealing or not dealing; how often

processes for all venues

clients deal and on which venues.

It is time-consuming and expensive to integrate and test each liquidity platform as a separate exercise given that much of the work overlaps. Many banks are deploying specialised proven middleware to provide an abstraction layer. This abstraction layer is then integrated with the bank systems.

Unified streams of interactions and deals provide

valuable

information

where

individual sections within the dealing room and middle office can configure overviews of flow information specific to designated interest or client groups, e.g. a sales

team

information

over-viewing from

specific

all

flow

customer

groups; spot trader overview of particular currency activity, or a chief dealer wishing to overview all conversations with central banks

during

periods

of

sustained

intervention. The latest systems create the ability to configure many different views of the entire activity of the trading floor, at a global or

42

january 2006

e-FOREX

It may seem a daunting and complex task to try and implement a hub system, especially where eFX systems were previously implemented in a flurry of time-to-market pressures resulting in unmanageable convoluted process flows. In reality it is very straightforward as the API and transformation components are usually available off the shelf and can be implemented in either a ‘big bang’ or a phased approach.

Conclusion

Efficient deal capture is usually seen as the start of the information chain for most FX trading systems, these transactions being the life blood of the bank’s business. This is no longer the case with many sell side banks as the choice of distribution channels and their inherent integration costs mean that trade efficiency needs to be measured much earlier in the trade cycle. A unified approach provides data that will enable sell side banks to evaluate any channel and relate it to its overall business plan. Huge savings in cost and risk come from adopting a standard flow processing hub and the simplified processes that follow. There is no requirement for additional staff and the existing IT division can supply instant connectivity to any new trade source the front office chooses to bring online. There is less thinking to do when implementing a new venue as all the venues now look identical. There is usually zero impact on downstream systems so there is less risk of failure or service disruption. Thus a base for unified process change is created.


Broadening client connectivity improving pre-settlement processing

Nick Dyne, CEO of Logicscope

Friends of mine that are not in the financial markets are genuinely shocked at how bad trade notification is – they don’t call it that, they just think it strange that their bank can update their account for a cash point withdrawal more effectively than many firms can be updated having traded $several million. I know that the two situations are not strictly comparable, but there is more than a grain of truth in their observation – pre settlement is the forgotten age in the life cycle of a trade. Forgotten except in the Interbank market, Reuters and EBS make a reasonable effort as do eSpeed and the voice brokers. Frankly, few in the interbank market would tolerate a trading platform that didn’t have post trade notifications as a reasonably easy plug in. This article touches on why it’s so bad and what can – and perhaps more importantly – should be done about it.

he “why” is pretty easy. It’s a combination of Reuters and

T

Efforts to provide a post trade notification service

apathy. Reuters, because they developed Ticket Output Feed

Apathy is harsh but justified. For one, until recently the sell side,

(TOF) and through their dominance in the early 90’s managed to

did not see plumbing the clients back-office in, for electronic

get all the back office vendors to write to it. However, TOF suffers

notifications, as important. The value-add was considered to be

from being highly restrictive in the instrument types it can carry,

in augmenting the pre-trade environment (by offering better

and is subject to fears about copyright infringement (although if

tools, credit, pricing etc) rather than dealing with the relatively

Reuters acted then all the intellectual property barristers in the

unattractive post trade plumbing. Second:

Inner Temple would be in business for years given the number of

notable exceptions) that have made the effort to provide a post

third parties that Reuters has knowingly allowed to use it.

trade notification service have done so half-heartedly.

44

january 2006

e-FOREX

those (with a few


>>>

The “traditional” approach is to develop an API and expect the client to develop to it – unsurprisingly, they don’t develop to it (they don’t have the skills or resources), so unless they purchase some intermediary products (like Deal Tracker Server from Reuters or BART from City Networks or our own TradeSTP client) the client is prevented from getting a quality of service that we all expect in our private lives. The notable exceptions have avoided the apathy trap and the Reuters trap. They provide interfaces to their clients’ deal capture or risk management systems and do not expect their clients to write to some API. Over the past couple of years, as we have rolled out TradeSTP for our partners, we have seen a change from the old TOF based serial interface so loved by all in the 90’s to a wide range of preferred solutions encompassing a wide variety of XML schema, and both custom interfaces to applications and middleware. The results of success can be spectacular. Unsurprisingly, if you offer a client an interface that he can plug into – he does! Not only do clients plug in, but they tend to trade more, and if our partners are to be believed, at wider spreads whilst increasing their loyalty. In a market where product differentiation is becoming increasingly difficult to create, something that can have three beneficial effects for not a lot of effort must be worth considering! The competitive versus collaborative argument

There is one client segment where the pre settlement issues are more complex than a simple delivery of trades with the occasional contra and an end of day reconciliation and that is fund managers – real and leveraged. The management of allocations presents a problem for all but a few banks. Indeed one very successful bank portal is successful because its post trade servicing for fund managers is so effective. There is no question that efficient pre settlement services to clients leads to improved trade flow and profitability, however, there are questions about whether the provision of such services should be considered competitive or collaborative.

BAXTER-Solutions Kft.

e-Mail: info@baxter-it.com | phone: +36 1 235 06 87


Broadening client connectivity improving pre-settlement processing

The competitive argument goes like this: If post trade services allow for service differentiation and commercial advantage – why share? Roll-out to your client base quickly and take advantage of your competitors’ sloth, take their clients whilst you can and devil take the hind most! (Hurrah!) The collaborative argument takes a longer term perspective. Trade notification is a necessary evil and one that all liquidity providers need to offer, it is therefore part of the essential service mix the professional market requires and clients don’t want to implement countless versions of their credit providers’ solutions but have a single pipe going in their system delivering all their trade notifications. As a provider of what is considered the world’s most advanced trade notification software, we are in two minds about the answer. So far, our clients have shown little interest in being collaborative, but that might be because they are early adopters and therefore naturally going for the competitive strategy. However, we can see the client side benefits associated with a collaborative approach. There are 4000 professional participants in the FX market, and on average they each have 10 lines of credit making the total problem 40,000 lines of credit need to be connected up. A competitive approach will take a great deal of duplicated effort to connect even half these relationships. A collaborative approach makes such a scale of implementation seem possible. The solution

If a collaborative approach were to be taken, what would it look like? And how would it be put together? For a start, there’s no point in only covering part of the professional market. Unless the solution covers all three client segments that need to be serviced (banks, investment managers, and large corporates), it will force independent solutions and therefore prevent the degree of collaboration required.

The service needs to have several

characteristics as necessary requirements. Given the sensitive nature of the relationships the trades reveal, the service provider(s) will have to be independent of a specific bank or broker (perhaps a “mutual” ownership?).

It would hardly be

effective collaboration if the service provider ended up competing on the pre trade side with its users! Ideally, it should be put in place quickly, using existing software and connections, and it should be capable of running over any type of IP network. It should obviously offer interfaces to plug in quickly and not expect clients to have to undertake any customisation. The component pieces can be put in place. For each client segment, a major provider can be identified, (indeed, the partners we are talking to represent connections to about 2000 of the 4000 participants) and specific client issues such as allocations and other workflow issues need to be dealt with. But putting the solution in place is probably the easy part.

In

addition, the major liquidity providers need to get together to form a collaborative group.

One or two banks probably

represent a joint competitive strategy not collaboration!

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Improving Customer flow quality: making best use of technology to monitor market making profitability Recent years have seen a huge increase in the volume of foreign exchange traded electronically. To date, emphasis amongst liquidity providers has been on securing volume. While many service providers have spent vast sums of money connecting clients to their services, some providers are beginning to reassess how they offer liquidity to clients, reevaluating, in particular, the quality of trade they receive. James Kemp, Managing Director, Stentra, takes a look at some of the challenges faced by liquidity providers and examines ways in which service providers can make best use of technology to monitor the quality of customer flow.

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James Kemp jkemp@stentra.com

Evolution of the e-FX market

The question of whether electronic trading is to become a long term part of the FX business has long gone: even the briefest examination of other markets such as equities, futures, bonds, and now the emerging SWAPS market, is enough to convince the deepest sceptic that the spread of the FX market will continue to mature through electronic channels. The scale of day-to-day FX market liquidity has created opportunities for buy and sell-side alike, as well as intermediaries.


>>>

Where FX differs is in the fragmentation

prices from different providers, possess a

e-FX liquidity risk is not a new issue

of liquidity across channels, and in the

clearer view of the actual market price.

amongst the more sophisticated FX

depth that can be supported within those

Furthermore,

trade

liquidity providers. From time-to-time,

channels.

anonymously, facilitated, in particular, by

many, if not all, have questioned the

EBS

rationale of offering the more complex

Technology: a double edged sword

Prime,

the can

ability act

as

to an

added

services (such as SER APIs) to clients.

encouragement to opportunistic clients.

Nevertheless, the fact that key liquidity

Banks have spent many millions on creating the technological infrastructure necessary to provide execution services to clients: a broad range of options now exists for clients to enter the market including

banks’

own

proprietary

channels, APIs, ECNs, or exchanges. However,

the

proliferation

of

new

channels, the increase in transaction speeds made possible by e-commerce,

“While the majority of clients are highly professional, there are a number of more aggressive counterparties, intent on ‘picking off’ banks where pricing ‘mismatches’ occur.”

providers have been picked off by opportunistic clients has left many banks questioning or re-evaluating their quest for this flow. Impact of aggressive counterparties

Despite their relatively small number, aggressive

clients

have

had

a

disproportionate impact on liquidity providers’ views. Apart from the direct

plus the diverse methods of price delivery (e.g. RFQ, RFS and SER), appear to have

The fact that major service providers

P&L impact of any (bad) trade, a number

made service providers vulnerable to

sometimes

of other trends result from the impact of

opportunistic

disadvantage is not surprising: in the

speculative

scramble to acquire a share of the digital

confidence in an offering is undermined

FX market, liquidity providers have had to

as a result of occasional bad trades. This,

While the majority of clients are highly

focus on connecting to numerous clients

in turn, often leads to traders pricing

professional, there are a number of more

via multiple channels, most of which vary

themselves out of the market in order to

aggressive counterparties, intent on

in pricing and execution work flow and

reduce risk. However, this has the knock-

“picking

pricing

support a broad range of technologies.

on

“mismatches” occur. Increasingly, banks

Far less investment has been made in

opportunistic and good quality customers

find themselves at a disadvantage: clients

putting in place the more sophisticated

are discouraged, and the impact on client

may have equally sophisticated systems

controls

confidence in the liquidity provider can

and, as they frequently have access to

monitor the quality of flow.

clients,

keen

to

take

advantage of any price “mismatches”.

off”

banks

where

find

necessary

themselves

to

manage

at

a

and

effect

clients.

of

loss

Firstly,

of

flow:

trader

both

not be ignored.

january 2006

e-FOREX

49


Improving Customer flow quality: making best use of technology to monitor market making profitability The impact of speculative clients has

FX is a truly global business, operating 24

And it is not always easy to separate the

other effects: diminished confidence in

hours a day, 5 1/2 days a week: not being in

good from the bad - is a client making

ability to manage risk leads to liquidity

the market as the result of an individual

persistent requests-to-trade necessarily

providers either switching off, or reducing

trader failing to switch on his price

speculative? Or is he a bona fide

services to clients. Again, this can have a

contribution

customer who is unable to get the price

ripple effect, as relationships with good

spreadsheet, or because his PC crashes, is

quality clients are also potentially open to

unacceptable. Robust technical solutions

damage.

are needed to support both SPOT and

Both manual and automated real-time

FWD pricing, as each has its own,

monitoring and responses to multiple

Improving customer flow quality

distinctive

for

client, channel or overall market hits have

The chief impact of electronic trading

SPOT crosses and forward curves must

limitations. Ideally, a combination of

occurs to the operational infrastructure of

be

the front office: where this infrastructure

account the full end-to-end technology

has been neglected (e.g. lack of effective

distribution chain, not just the speed with

pricing tools or execution controls,

which the pricing engine can push out the

existence of inadequate reporting tools to

rate. Stability and control, combined with

monitor

close coupling of pricing and execution

client

trends

or

identify

exceptions in client behaviour patterns),

from

a

challenges.

carefully

optimised,

home-grown

Latency taking

into

services, is critical to any offering.

the challenges in reducing opportunistic Controls

Nevertheless, if the confidence of liquidity

In many cases, a trading bank’s ability to

providers and their willingness to expand

price is detached from the capability to

electronic

offerings

react and adjust to the market, or to a

unshaken,

effective

to

tools

remain must

be

implemented.

“Appropriate pricing tools (which maximise the reduction of poor pricing and delivery through execution service) are particularly essential.”

manual or automated responses should be possible, including the automated widening of spreads for predefined periods of time, the pulling of trading to a specific client or channel plus the ability to pull out of the entire market. Client monitoring

client behaviour will be more significant.

is

he wants?

Making

management

decisions

and

trading strategies on the back of the monthly FXall report does not provide a

particular client. In order to counteract

fast enough means of reacting to client

this weakness, better integrated tools are

and market conditions.

needed. For example, from the trader’s

accurate view of client activity both from

desktop it should be possible to view both

real time and historical data is essential to

where the trader is on each market and to

establishing a client’s intent, as well as to

control auto-trading and streaming levels

identifying speculative clients.

Creating a more

supplied to individual markets. Optimally, a

combination

of

pricing,

market

Provision of appropriate tools to sales and

obligations and levels, as well as market

trading

interest and positions should be available.

assessment of trading appetite amongst

Automated intelligent pricing is also

customers. Tools and data to support

desirable.

trading, sales and management are

Pricing

teams

can

help

with

the

required across different views and Hit protection

media, while the valuable information

maximise the reduction of poor pricing

While service providers want to be able to

generated from these sources must also

and delivery through execution service)

weed out undesirable customers, they

be tailored to support varying degrees of

are particularly essential. For most banks,

certainly do not want to deter the good.

usage and type of audience.

Appropriate

50

pricing

january 2006

tools

e-FOREX

(which


The Smart-Trade platform(s): a private virtual market inside the bank

In many banks and financial institutions, e-trading systems in place today are very static, linear and lack a lot of the flexibility and interoperability initially desired. Particularly, it is difficult for a bank to aggregate its entire tradable liquidity into one single virtual market and for traders to have a unique view of the aggregated market depth they can trade on, while controlling the quotes they broadcast to their clients and managing, in return, the auto-crossing conditions of the clients’ orders and interests. The key is to create a single internal market that can let orders be matched against an aggregated liquidity pool, according to customizable rules, and that can show a unified market depth for all markets (internal and external). Such a virtual market must bring a common access layer for all the types of liquidity, be adaptive to the constant changing cartography of liquidity sources, distribution channels, trading modes, messages types, instrument classes, client-facing and order-entry applications, while maintaining a unique and harmonized silo where the liquidity is maintained. In parallel, the core structure and architecture of the platform must support the changes that are constantly carried out on the delivery channels and on the pricing sources.

As a solution to this equation, Smart Trade Technologies has developed a private order-routing and order-matching platform that banks and financial institutions can deploy as a software within their infrastructure.

The Smart Trade platform is composed of one or several interconnected platforms, able to communicate with various external liquidity sources, deal with customizable orders types, rulesbased routing and execution conditions, message protocols, internal data referentials, client-facing and order-entry applications, symbology translation issues, external permissioning. The Smart Trade platform constitutes eventually a flexible single sign-on trading network, that the bank controls functionally and technically, integrates within its own IT teams and that remains stable and evolutionary over time. Its performance and throughput are in line with today’s and tomorrow’s requirements emerging from the highly demanding clients and program trading engines.

The design of the Smart Trade platform’s architecture has been built around a few core concepts: • extremely robust routing and matching engine • Gateway Framework to build specific connectors to external liquidity sources • exhaustive APIs to support and build multiple types of client-facing and order entry applications • independency to the asset class, and the instruments quoted • compatibility with any type of order and trading mode • central order book: • integration of credit limits: • integration of customer spread management/ price tiering • connection to third party data referentials

For more information contact contact@smart-trade.net Paris/Aix-en-Provence: +33 1 44 50 19 19 New York: +1 212 618 63 83 www.smart-trade.net

Sponsored Statement january 2006

e-FOREX

51


Was this FX trade aggressive? Mark to Market Monitor (MMM) With the profile of FX Market trading activity changing dramatically over the last two years - especially with the advent of aggressive Hedge Funds systematic trading - FX Market Makers and Liquidity Providers have had to test repeatedly that their pricing remained both competitive and profitable. In order to do this, Market Making Banks needed statistics but also up to the minute dynamic information on customer trades and their own price flow. In response to a request from some of its Market Maker clients, BAXTER-Solutions Kft. developed a module that works as a trade blotter monitor. The â&#x20AC;&#x153;Mark to Market Monitorâ&#x20AC;? (MMM) module allows pricing and trade performance to be analysed on a realtime as well as historical basis. BAXTER designed and built the MMM tool in answer to

THE e-FOREX PRODUCT

the growing need to separate aggressive customer business from electronic mispricing.

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january 2006

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Functional highlights

The functionality involves taking every trade visualised in a blotter and measuring it against benchmark prices at various time-frames immediately following the trade. After considerable testing, it was identified that 3 default interval readings would be set at 5, 20 and 60 second.

The fundamentals behind these values are that the estimated effects of various unsustainable trading practices like arbs, lineups or insider trading (trades made on the back of very large trade knowledge) show up particularly well on post trade short term market movements.

In order to make the system user friendly and effective even during busy market times, the results are displayed with simple colour codes: green-orange-red to indicate if the Market Maker is either “in”, “at” or “out” of-the-money vis-a-vis the benchmark price (generally the mid-market at the time interval).

This allows the “Flow” Traders to identify suspicious activity when lumps of red accumulate visually on their blotters. The next natural step is to use the tool to double click on the trade line in the blotter to visualise a “time & sales” series of price action before and after the Deal, enriched with a chart representing the price action with the trade pinned in its context. Following this, the Dealer can run a quick statistical analysis on the specific Clients/Platforms and respond adequately.

Market response

One of the side effects of the MMM usage has been to trigger specific currency-pair pricing to be re-examined after results were analysed from a quantitative Profit & Loss perspective. Given the change in the nature of the FX Business, it is no longer possible to deal with all clients on an equal footing. While many should be dealt with a service-conscious attitude, some clearly fall into the “market counterparty” category and should not be priced (or priced wider) during difficult market conditions.

This functionality was very well received and additional features have been added in time. The tools were designed to enrich the Client/Counter party information story and include the ability to examine a client's full trade history, profitability as well as to drill down to individual trades when required. The perspective gained from this simple and easily deployed tool has been mostly in the area of increased Customer knowledge and optimized pricemaking competitiveness. All in all, a positive impact on Customer service and ultimately on the Banks' FX trading profits

january 2006

e-FOREX

53


>>>

Extending Technology innovation to

Tri-Party Credit Analysis The nature of innovation is changing. In addition to technical skill and creativity, many innovations in financial services are now engineered with a deep understanding of business processes. For example, the automation of the tri-party give-up has reduced confirmation time from hours or days to real-time as banks have deployed new sophisticated networking and software products. Michael Laven

H

owever, the true innovation in this technology is not in its features and functions; rather, it is that the technology was designed and built to correct a business process that was inhibiting growth. The results are astonishing. By lowering the cost of trading through automation, the industry boosted the number of participants, the number of assets under management, the number of channels and consequently, generated huge growth in the number of trades.

Traditionally, executing banks involved in tri-party transactions faced major time delays. For example, a client may have ordered a trade and not received confirmation of the exact give-up price paid until the following day. This was due to in large part to system incompatibility. Furthermore, confirmations would be sent manually, which also introduced the possibility of human error. When summed up, all parties involved had an information gap that affected the ability

Defining the problem

to know their positions dynamically, which in turn reduced

Process innovations, like so many others originate with a problem. In the case of tri-party give-ups, the problem was how to make tri-party transactions more efficient by connecting the client, the prime broker and the executing bank in real-time.

trading volumes. No longer so. Prime brokers, their clients and

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january 2006

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executing banks now have interoperable, always-on connections through innovative network services such as Hotspot FXi, Currenex Prime Brokerage and Traianaâ&#x20AC;&#x2122;s Harmony service.


Traiana Harmony – Revolutionizing the Give-Up Process Traiana Harmony Message Center and Tri-Party Credit provide a secure, scalable service to manage the give-up process between prime brokers, executing banks and ECNs

Already adopted by the industry to drive volumes of FX trading, Harmony has transformed the give-up process, by streamlining tri-party processes, reducing costs and delivering superior client service. To find out more about Harmony, contact Traiana today.

London – New York – Tel Aviv www.traiana.com

London +44 (0)20 7614 3540

New York +1 866 760 2118


Extending Technology innovation to Tri-Party Credit Analysis

These networks enable real-time monitoring and reporting of

trillion in assets. In a TowerGroup research paper entitled ‘The

intra-day positions.

All parties can now connect seamlessly

Changing World of Hedge Fund Managers, analyst Matthew

using their own preferred method and format e.g. XML, Excel

Nelson estimates that hedge fund administrators alone will

files in email, etc. All this combines to speed up the give-up

spend $250 million on technology by 2008. Much of this will be

process, enabling more trading volume.

in invested in their trading platforms.

Lowering the psychological barriers

The power of timely, accessible and accurate information has the effect of lowering psychological barriers to entry for risk-averse institutions and lowering capital barriers to entry for newcomers

“Hedge funds, in fact, are in many ways driving financial services technology innovation and investment.”

because they can plug into those networks with less up-front technology investment. This confidence can be seen as banks

Hedge funds increasingly view foreign exchange as an attractive

swarm toward the hedge fund market, which alone accounted

asset class. According to the Bank for International Settlements

for more than $12.7 billion in new money in the third quarter of

Survey 2004, FX turnover rose from $1.38 trillion to $1.88 trillion,

2005, according to data compiled by Tremont Capital

from 2001 to 2004, with hedge fund trading playing an important role and is forecast to expand to $3.0 trillion by 2008.

Management.

This high level of interest is an obvious

As processes improve, innovation spreads

opportunity for foreign exchange prime

to other processes and across to other

brokers. Once relegated to a small, dark

asset classes. For example, innovations

corner of the trading floor, they are

in the tri-party give-up process are now being extended to credit analysis.

now

investing

in

automation

Previously, a manual calculation

technology to take a lead position

would have been made following the

in differentiating themselves and

give-up to determine whether the

moving up the value chain in client

prime broker was trading within the

service. Real-time tri-party credit

credit limit in the tri-party agreement.

analysis is crucial here because it enables brokers and executing

Internal control systems were costly,

banks to make better decisions more

slow and prone to error. Now it is

quickly. The ability to plug into a

possible to centralize credit calculations, through

similar

process

network reduces time-to-market and

automation

investment in additional resources. Industry

platforms and networks, so they are done as the transaction is occurring. This function gives the prime

analyst Dushyant Shahrawat writes in his report ‘Stocks,

Bonds,

and

Currencies:

Analyzing

broker and the executing ban an accurate credit position in real-

Automation of Capital Markets Across Products’ that automation

time. Executing banks can also set limits and create rule-based

moved from equities to bonds to foreign exchange, and

alerts that help manage risk more proactively.

each asset class has automated different processes to different degrees.

“As processes improve, innovation spreads to other processes and across to other asset classes.”

One can see how innovation can spread to different parts of a single industry. Indeed, 38% of financial services respondents in a survey done by The Economist Intelligence Unit (2005) declared that technology innovation would have the greatest impact on

Importance of Hedge Funds

The automation of the credit analysis process has resulted in increased confidence from the large financial services

their company’s business model between 2005 and 2010. Collaboration

institutions to expand their business to include more aggressive

Innovation, it should be noted, also comes from collaboration.

investors. Banks want more hedge fund business, but they want

Institutions like ABN AMRO, BNP Paribas, HSBC and JPMorgan

to be able to calculate risk with immediacy.

Chase increasingly work with technology vendors to define and agree on how technology can help define and address basic

Hedge funds, in fact, are in many ways driving financial services

process elements that would benefit everyone in the trading

technology innovation and investment. At a recent Wharton

universe. Their active engagement is vital and as they continue

Finance Conference, Dow Kim, Merrill Lynch executive vice

to work with the technology industry to examine and improve

president and president of global markets and investment

their processes, they will find ways to apply technology to make

banking, noted that 8,500 hedge fund managers control $1

better decisions, which will increase growth and profitability.

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Privacy Please – the attraction of anonymous FX trading Anonymity is one of the main advantages of electronic execution. A plethora of FX trading platforms today offer anonymity, helping firms to keep private and profitable.

allocation functionality, that can help firms

Who trades anonymously?

deal with an increasingly challenging

Hedge funds are the largest and fastestgrowing segment of the buy-side FX community. More than any other market participant, hedge funds are known for trading FX speculatively. According to a recent Greenwich Associates survey, 50 percent of hedge funds trade FX for alpha returns. Accessing large amounts of liquidity in the least disruptive way is a key component of their strategies.

regulatory environment. One of the key benefits to electronic execution: anonymity has been lost in the Harrell Smith is Manager, Securities

shuffle of operational efficiency and regulatory initiatives.

and Investments at Celent.

The ability to

remain anonymous – to one degree or another – has always been a key selling

T

he growth of the global foreign exchange market has been well-

documented, as has been the rise of electronic trading.

According to recent

estimates, electronic FX trading currently accounts for over 60% of spot volume in the inter-dealer community, and 43% of spot volume in the dealer-client market. Celent predicts that by the end of 2007, etrading adoption in the inter-dealer and

point for electronic trading across all asset classes. Today, almost all leading FX trading platforms provide some degree of anonymity, providing cover to firms who are reluctant to display liquidity, want to avoid market analysis and keep information leakage to a minimum, and can achieve cost savings via anonymous, sponsored access to inter-dealer platforms

dealer-client markets will increase to 90% and 60%, respectively, driven by greater standardization of technology through industry initiatives such as the Continuous Linked Settlement (CLS) and FIX.

With

execution having long-since become commoditized, firms are now turning to etrading as a “means to an operational end” – that is they are looking for technology with extensive settlement and

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“One of the key benefits to electronic execution: anonymity has been lost in the shuffle of operational efficiency and regulatory initiatives.”

Hedge funds have begun creeping into the inter-dealer market on a sponsored basis. EBS’ Prime Professional service allows hedge funds to access inter-dealer liquidity, while remaining anonymous to the market as a whole. Although dealer liquidity is the main attraction for hedge funds using EBS’ new service, the ability to trade anonymously is an enormous draw as well. The inter-dealer market has always had a soft spot for anonymous execution, whether through the use of voice brokers or via electronic execution. For the most part, inter-dealer electronic execution operates on the anonymous execution/ disclosed settlement model, a service offered by both Reuters and EBS.


However, dealer banks have little, if any,

For anonymous execution, Reuters also

incentive to trade on systems such as

offers a spot and forward matching

eSpeed’s FXSpot, which offers not only

platform, which sits atop Dealing 3000.

full anonymity but the advantage of a

The platform is a centralized order book

centralized counterparty – BGC (the

and counterparty information is given up

voice brokerage formally known as

post-trade.

Cantor Fitzerald voice broking). Dealers

maintain

strong

Why? trading

EBS. EBS, launched by a partnership of

is

the world’s largest FX market-making

universally strong, so there is no

banks and a major presence in the inter-

advantage from a pricing standpoint to

bank spot maker, is the largest inter-

trade

offers

dealer FX trading platform in the world.

standardized pricing to all participants.

EBS’ main product is EBS Spot, an

And while post-trade anonymity is

anonymous

certainly an advantage to all participants,

platform. As with Reuters, counterparty

it is not enough to dislodge established

information is given up post-trade.

relationships,

on

and

a

their

platform

>>>

credit

that

inter-dealer

execution

dealer banks from either EBS or Reuters. E-Trading Platforms – the Multi-dealer

“The inter-dealer market, has always had a soft spot for anonymous execution, whether through the use of voice brokers or via electronic execution.” Traditional buy-side firms are least interested in anonymous trading. With FX

investment

strategies

designed

primarily around multi-portfolio hedging, asset managers generally do not trade FX for alpha. As such, the ability to trade anonymously

is

generally

of

little

concern to traditional buy-side firms.

Market

FXAll. FXAll, owned by 17 banks, has a varied customer base, composed of corporations, asset managers, banks, and hedge funds. Until November 2004, FXAll did not offer anonymous trading. At that time, FXAll released Altair, a new version of its trading platform with 20 new features. The QuickFill feature of Altair provides anonymous trading, although FXAll claims that few customers use this function; this is most likely due to the relatively low number of hedge funds using the platform. FX Connect. State Street-owned FX Connect uses a pricing mechanism that is strictly RFQ, with no anonymous trading. State Street asserts that its intended customer base does not

Anonymity and E-Trading Platforms – the

wish to be anonymous

Inter-dealer Market

because it receives better

Reuters. Reuters’ Dealing 3000 relies on

prices

an RFQ model, with message broadcasting

know with whom they

of up to 32 participants.

are trading.

when

banks

january 2006

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59


Privacy Please – the attraction of anonymous FX trading As a result, FX Connect has not focused

Hotspot FXi. Hotspot FXi offers the best

Of course, this feature is only as good as

its

fund

environment for institutional firms and

the integrity of internal controls at BGC

community. However, FX Connect does

attention

banks by bringing liquidity in two forms:

(which still maintains an active FX voice

offer a feature called Quick FX, launched

banks stream executable prices into the

brokerage business).

in

directional

system, and buy-side clients submit

anonymity for customers wishing to

market and limit orders. All quotes and

However, eSpeed takes pains to assure its

transact single or block trades with up to

orders are displayed anonymously in a

clients that information about their

four banks in competition.

central

Counterparty

trading activity will never be shared with

information is given up to the prime

the firm’s voice brokers, none of whom

broker after execution. Hotspot FXi is

provide liquidity to the eSpeed platform.

perhaps most attractive to the hedge fund

eSpeed targets banks of almost all sizes,

community, who are comfortable trading

and to a lesser extent, trading arcades.

2001,

Currenex.

that

on

the

hedge

provides

Like FX Connect, Currenex

does not offer anonymous trading. The firm relies primarily on both disclosed RFQ and executable streaming price trading models.

order

book.

in a central order book environment. Conclusion

“As the inflow of capital into the hedge fund community continues, more and more firms will explore the use of trading platforms that offer anonymous execution.”

New Entrants

As the inflow of capital into the hedge

LavaFX. Citigroup-owned LavaFX seeks

fund community continues, more and

basically the same customer base as

more firms will explore the use of trading

Hotspot, focusing on hedge funds and

platforms

that

CTAs. LavaFX supports 24 currency pairs

execution.

However, Celent does not

and offers the same degree of anonymity

expect either traditional asset managers

as Hotspot, with counterparty identity

or larger broker-dealers to switch to a new

being disclosed to prime brokers after

platform simply for the sake of complete

execution.

post-trade anonymity.

eSpeed. While almost all electronic forex

Buy-side firms simply do not trade in a

trading platforms offer some degree of

manner that would warrant anonymous

anonymity, eSpeed’s FXSpot is the most

execution, and the sell-side appears

comprehensive in this regard. BGC (the

content with the Reuters/EBS duopoly –

entity

Cantor

for now. Nonetheless, the ability of most

is

the

FX trading platforms to offer at least

eSpeed

partial anonymity to their clients is telling:

formally

Fitzgerald

voice

known

as

brokerage)

counterparty to every trade.

60

january 2006

e-FOREX

it

comes

offer

to

anonymous

refers to this as “principal-to-principal”

when

trading – the buyer and seller never know

counterparty disclosure, the less said

trading

and

each other’s identity.

the better.


REGIONAL eFX PERSPECTIVE

Scandinavian FX – wired and getting more so By Andy Webb

Andy Webb

Scandinavia has historically enjoyed the reputation of being a region where technology adoption runs ahead of the curve. (Online banking was an everyday event there when it was barely a glimmer in clients’ eyes elsewhere.) By and large, this readiness to accept new technology has also been reflected in the region’s rapid adoption of electronic FX trading. As elsewhere, STP and more transparent price discovery have been major factors in this. The opportunities present in Scandinavia have also not been lost on the multibank portals, several of which have been recently making concerted sales efforts in the region.

A

s in other parts of the world, FX

also contributed,” he says.

trading in general has been rising

According to some, the growth in FX

steadily across Scandinavia in recent

activity has in some cases been country-

years. Some of this activity has been on

specific. “In view of its high-yielding

the back of trends common elsewhere,

currency, we’ve always seen a significant

such as the growing acceptance of FX as

amount of FX activity from Norwegian

an asset class in its own right. This has

clients,” says Daniel Darst, Head of

seen a region historically regarded by

Marketing at Saxo Bank. “However, we’re

many

now seeing similar interest coming from

as

primarily

a

stock-trading

environment, increasingly embracing FX

Sweden and Denmark as well.”

as a tradable. Apart from general factors, FX activity in

Daniel Darst

“In view of its high-yielding currency, we’ve always seen a significant amount of FX activity from Norwegian clients,”

62

january 2006

e-FOREX

The appeal of FX has been further enhanced

parts of Scandinavia has also been

by other factors according to Jesper Ronald

specifically driven by the Euro – or rather

Petersen, Head of Global Flow & Solutions

the lack of it. Sweden and Denmark’s

at Danske Bank. “Low bond yields and

delayed Euro-adoption coupled with

growing interest in overseas equities have

economic (and thereby also export)


growth across the region has inevitably

Scandinavian banks are still transacting

resulted in an additional fillip to intra-

an appreciable portion of mid-sized

regional hedging activity.

corporate client FX business at standard

>>>

fixing rates. This has been further boosted by the growing focus of many mid sized and

The size of Scandinavia’s capital markets

smaller Scandinavian corporates on FX risk

in relation to its volume of savings and

management, while larger organisations

pension assets makes investment outside

continue to play a major role. “I would

the region by asset managers inevitable.

describe the large corporate and asset

Real money managers represent the bulk

manager segments in Scandinavia as being

of these assets and are regarded by the

among our most sophisticated and active

banks that service them as highly

users,”

sophisticated

says

Mark

Warms,

General

instruments

Manager for Europe, FXall.

in

terms

used

and

of

both

strategies.

However, the sheer scale of their hedging activity often exceeds their comfort factor

Sellside/buyside segmentation

Most Scandinavian banks have a strong intra-regional

focus

in

their

FX

distribution to clients. A large percentage of these banks’ clients are mid-sized corporates. Collectively, this segment accounts for a significant proportion of non-interbank FX activity in the region. This contrasts with countries such as the UK where large corporates, conventional asset managers and hedge funds tend to be more prominent.

with the capacity of electronic platforms, so their larger FX deals are frequently conducted by phone.

Mark Warms

“I would describe the large corporate and asset manager segments in Scandinavia as being among our most sophisticated and active users,”

As elsewhere, hedge funds are an increasingly

important

part

of

the

electronic FX markets in Scandinavia. However, regulation has meant that they have had a rather slower start than in some other parts of the globe. “There have been legislative issues around not only their existence, but also their availability to investors,” says Kenneth

The size of this mid-sized corporate sector can pose a problem for banks trying to achieve efficiencies by encouraging a migration to electronic FX. These clients’

Steengard, Head of e-Markets at Nordea. “These issues have now been resolved in Sweden and are in the process of being resolved in Denmark. The hedge fund

lower individual FX volumes mean that a

market

large number of them have to be

dominated by Sweden, but it seems clear

converted to electronic trading before

that it will expand across the region over

meaningful scale economies can be

the next few years, which is one of the

attained. In view of their number, it is

considerations that has prompted our

obviously

investment in prime brokerage facilities.”

more

cumbersome

and

in

the

region

is

Kenneth Steengard

currently

“The hedge fund market in the region is currently dominated by Sweden, but it seems clear that it will expand across the region over the next few years”

expensive to accomplish this than with (for example) a small group of high

Others have seen similar signs of growth.

volume asset managers. In many cases it

“While as yet it is nothing like the activity

is also more difficult. Lower individual FX

you observe in centres such as London, it

volumes mean that the STP advantages of

is significant,” says Xavier Alexandre,

electronic

less

Head of Europe and Asia for Hotspot.

compelling argument for this sector than

“Scandinavia currently ranks fourth in

for large corporates, for whom it is

terms of global hedge fund activity on

essential.

Hotspot. However, we also see the real

trading

are

a

far

money sector in the region as having a lot However, when these mid/smaller-sized

of potential for us.”

corporates do go electronic, the margins are worthwhile. By virtue of their size, not

According to Danske’s Petersen this

many of these corporates have multibank

growth will only generate business for

relationships, so they are likely to be

those banks with the right solutions.

trading FX on a single bank portal. Their

“Hedge funds are a demanding client

expectations

be

segment that expects competitive pricing

particularly demanding either, as some

may

not

as

yet

and full STP as an absolute minimum,

would previously only have had the

before even considering a price maker or

“price transparency” of yesterday’s FX

electronic-platform,” he says.

Xavier Alexandre

“I would say that the percentage adoption of electronic trading in Scandinavia is higher than elsewhere in Europe,”

rates in the newspaper. In fact, some january 2006

e-FOREX

63


However, overall we still do a lot of FX business online. Some 70% of our FX activity is in swaps and we execute 7080% of these electronically. This is also partly driven by our cash management activities. We have a cash surplus of 65 bn SEK - that is too large to invest domestically and so a notable amount is invested in instruments such as foreign denominated commercial paper.” Despite the continued need for some phone dealing, banks are upbeat on the broader electronic prospects. “We are definitely observing appreciable growth in electronic FX trading across the region,” says Bjorn Lundvall, Head of E-Commerce Markets at Handelsbanken. “I also think we are seeing this growth among all sizes of corporate, especially on forwards, which are by far the most actively traded instrument on our platform.” Platforms

such

Scandinavian

as

market

Hotspot

regard

participants

as

among the earliest and most wholehearted adopters of electronic FX in Europe. "I would say that the percentage adoption of electronic trading in Scandinavia is higher than elsewhere in Europe," says Hotspot's Alexandre. "In comparison with some other countries, Scandinavians absolutely do not have a problem with the concept." Even technology vendors with a core

Electronic adoption….

As might be expected, adoption of

presence in other markets have noted the

electronic FX trading in Scandinavia has

growth in electronic FX trading in the

been rapid. For example, in Sweden,

region. Orc Software provides trading

unofficial Riksbank figures put the level of

solutions and connectivity for equity,

electronic interbank FX at close to 90%.

fixed income and derivatives markets, but

Electronic trading also accounts for some

also offers FX hedging capabilities via

30-40% of buyside FX activity by transaction

connections to various FX portals.

count, and 20% by transaction volume. “We have seen a noticeable increase in The discrepancy is caused by the need to place certain orders over the phone, as Stefan

Daberius,

Head

of

Markets,

Ericsson Treasury explains. “We use FXall, but

on

larger

and

more

sensitive

transactions we still tend to deal on the phone,” he says. “For example, we have a Stefan Daberius

“Some 70% of our FX activity is in swaps and we execute 70-80% of these electronically.”

64

january 2006

e-FOREX

electronic FX hedging in Scandinavia,” says Thomas Gidlund, Product Manager at Orc. “This has been particularly obvious in the case of cross currency equity arbitrage strategies, where the potential profit per trade is relatively

recurring hedging need of our commercial

small and FX represents the bulk of the

transaction exposure. That results in

risk. I think traders are increasingly

hedging trades in pairs as USDSEK that

appreciating the advantages of managing

are typically very substantial and therefore

their FX risk in real or near real time,

have to be done by phone.

rather than waiting until the end of day.”


>>>

Scandinavian FX – wired and getting more so …and its effects

“This

As elsewhere, a common concern among

FXConnect is pitching to large corporates,

Scandinavian banks was that increasing

who are not its usual client base,” says

adoption of electronic FX trading would

Nordea’s Steengard. “That aside, it could

impair

Personal

also be a tough sell in terms of

contact would be reduced, and in a highly

functionality, as potential clients already

commoditised environment, clients would

on FXall would have to move from an

client

relationships.

become largely price driven in their purchasing decisions. Fortunately, the

would

seem

to

imply

that

environment with streaming dealable rates to one without.”

reality appears to be rather different. “We took the view that putting a commodity business onto an electronic platform actually leaves more time for adding value in face-to-face discussions with clients,” says Peter Granqvist, Head of FX Sales at Swedbank Markets. “In practice, we have found that clients have responded well to this

concept.

Rather

than

simply

discussing price we have time to advise on strategy and potentially more efficient means of achieving their objectives.”

different aspect of client behaviour as a result of electronic trading – a sharp increase in activity. Some corporates have evidently found the convenience of instantaneous hedging irresistible. As a result, they execute FX trades as soon as individual exposures arise, rather than waiting until the end of the day or week and trading a netted amount. “We mostly notice this phenomenon among midsized corporates rather than the large managers,”

says

Nordea’s

Steengard. “They presumably feel that the convenience and immediate risk management outweigh the higher costs involved. The increase in activity when these

clients

switch

to

effort across the region with RTFX. Initial target clients were mostly smaller banks, but corporates are now also being approached. The company’s distribution network and existing presence should stand it in good stead, as should its

Bjorn Lundvall

“We are definitely observing appreciable growth in electronic FX trading across the region,”

adoption of the TWIST standard. Reuters also seems to be trying to use RTFX as a lever to generate more volume on RTFI. Bloomberg appears to be approaching

Other banks have observed a very

asset

Reuters has also been making a concerted

electronic

trading is significant – perhaps 20-25%

the task from the diametrically opposite direction, by leveraging its existing fixed income client base to stimulate FX trading on its Professional service. Bloomberg’s model also differs significantly from other multibank portals in that it is not currently charging the sellside banks for quoting on its platform. “The potential obstacle for both Reuters and Bloomberg is that the switch they are proposing to prospective clients isn’t very intuitive,” says Nordea’s Steengard. “For example, in the case of RTFI, why would a fixed income trader want to move from

Thomas Gidlund

“We have seen a noticeable increase in electronic FX hedging in Scandinavia,”

Bloomberg or TradeWeb to Reuters? However, on a more general note, FXall’s decision to charge the buyside fees has possibly opened a window of opportunity to other multibank portals.”

on average.” Whatever the impact of FXall’s charging Multibank portals

policy on the competitive landscape,

At present, FXall enjoys pole position

Scandinavian

among

in

platform have been pleased with the

Scandinavia. In the past, various other

results. Skandia Capital had been using

multibank portals have attempted to build

SEB’s single bank portal for three years

up their presence in the region, but with

before migrating much of its commodity

little lasting impact. However, this is

FX activity to FXall over the past few

starting to change, with both new and

months. Skandia took its time in selecting

long-established

a multibank platform, as it assumed

the

multibank

portals

multibank

portals

making a pitch for market share.

(correctly)

buyside

that

some

users

of

the

consolidation

Peter Granqvist

among multibank portals would be FXConnect currently appears to be using

inevitable. It therefore did not wish to run

its integration with SunGard’s Quantum

the risk of having to establish connectivity

treasury management system as a basis

to a new portal if its original choice

for its sales campaign in Scandinavia.

ceased to exist.

“putting a commodity business onto an electronic platform actually leaves more time for adding value in faceto-face discussions with clients,”

january 2006

e-FOREX

65


“We have achieved significant savings

Nordea has made a similar investment in

through price improvement by using

functionality for IAS39. This provides

FXall,” says Robert Celsing, President of

clients who are exploring hedging options

Skandia Capital. “The liquidity is good,

with the necessary underlying calculations

we can deal in the size we require, and we

for supporting their assertions of hedge

have also been able to achieve the level of

effectiveness. The IAS39 tool also has a

STP we desired. We still use SEB’s platform for overnight and minor spot same day trades, and for large spot deals and FX options we use the phone. We feel the balance we now have across single and multibank portals and the phone is

strong Scandinavian slant as a result of Nordea’s consultations with regulators and accountants in the region. Danske’s emphasis has instead been on ease of use and also on features that

about right.”

reduce clients’ internal administration. “Clients appreciate such facilities as block

Single bank portals

White labelling in the bank-to-bank sense is not common within Scandinavia. Apart

and split trades, which save them a lot of internal booking,” says Danske’s Petersen.

from Saxo Bank’s extensive white label relationships (the majority of which are

Banks have also made easy client

extra-regional) there is believed to be just

connectivity and STP a discriminating

one bank white label deal in existence

factor, with Handelsbanken and others

(between a London bank and a small

making their platforms TWIST compliant.

regional bank). Most Scandinavian banks

As a result, some banks feel that their

have instead opted to buy off the shelf

connectivity and functionality efforts have

vendor systems and customise them to

started to turn the tide away from

meet their clients’ needs.

multibank portals and back towards single bank platforms. The quality and nature of

Basic functionality is therefore fairly standardised

across

single

bank

platforms in terms of capabilities such as streaming dealable prices. This has left banks in the region with the problem of which custom features to add to ensure that they stand out from the pack.

bank relationships have also been an important factor in this. Many corporates do not regard FX trading as an isolated activity. Therefore, FX discussions with the

bank

often

also

incorporate

conversations about cash pooling, cash forecasting and electronic payments – all

Swedbank’s strategy has been to leverage

of which services banks can provide

its East European expertise (via its major

online through a single log on.

stake in Estonia’s Hansa Bank) to provide coverage of unusual currency pairs. “We

“I think the ability to compare prices on

have one click dealing available in pairs

multibank portals - especially when those

not commonly available elsewhere,” says

prices will be very similar anyway - has

Swedbank’s Granqvist. “We are also

ceased to be quite such an attraction,” says

prepared to quote these pairs in longer

Handelsbanken’s Lundvall. “Corporations

dated forwards as well as just spot.”

are

also

rationalising

their

banking

relationships, which means that the Nordea has taken a rather different approach by focusing on by focusing on analytical tools in addition to trading services. It has put together a set of pricing and analytical tools that are very specifically aimed at the Scandinavian market. “You often find that generic analysis packages and pricing models

Robert Celsing

“We have achieved significant savings through price improvement by using FXall,”

66

january 2006

e-FOREX

relationships they retain are stronger and likely to influence a preference for a single bank FX platform.” Nevertheless multibank

some

portals

banks as

an

still

see

important

ingredient in the overall client service mix.

either don’t cover this region-specific

“A proprietary platform with strong

angle at all, or do so incorrectly,” says

supporting research works well with the

Nordea’s Steengard. “As a result we have

SME segment,” says Danske’s Petersen.

seen strong take up of these tools –

“But you have to be able to combine this

particularly among large corporate and

with a strong multibank portal presence to

asset manager clients.”

service other client segments effectively.”


Scandinavian FX – wired and getting more so FX options

Furthermore, there is usually an element

As yet, FX options are a rare online sight

of strategy discussion involved in FX

in Scandinavia, but rising interest across

option

all client segments is likely to see them

accomplish by phone or face to face.”

trades,

which

is

easier

to

appearing there in the next year or so. Banks in the region are finding that FX

Automated trading and price improvement

options are now a commonly discussed

Scandinavia has been quick to pick up on

alternative to forwards in clients’ hedging

some of the latest trends in electronic FX.

deliberations. Banks such as Nordea have

For example, several commentators have

also seen strong demand in the past year

noted automated trading activity. “We are

for structured products that incorporate

seeing clear evidence of high-frequency

exotic FX options, as a means of

automated trading in Scandinavia,” says

combining yield enhancement and FX risk

Saxo Bank’s Darst.

management. “Though I don’t think many clients are quite yet ready to trade this

While much of this activity may be

sort of product (or straight FX options)

attributable

online, things are definitely moving in this

operations and hedge funds, some large

direction,” says Nordea’s Steengard. “We

hedgers are also expressing interest in the

are

to

concept. Skandia Capital is responsible

incorporate the necessary capabilities in

for hedging the FX risk of Skandia Life’s

our FX platform.”

$35bn portfolio. Although the hedging

therefore

already

planning

to

proprietary

trading

Jesper Ronald Petersen

“A proprietary platform with strong supporting research works well with the SME segment”

mandate is “semi-passive”, the size of the Some see the move to online FX options

portfolio

as a gradual process. “As yet, clients do

rebalancing hedges still generates a

not appear particularly interested in

substantial volume of trades.

trading

FX

options

online,”

means

that

extending

or

says

Handelsbanken’s Lundvall. “However,

“I think the automated calculation and

they are expressing interest in online

execution

option pricing tools, which they can use

rebalancing could be interesting,” says

prior to trading options with us on the

Skandia’s

phone. As a result, I think we will be

technically possible, as we could

adding

draw the necessary underlying

some

sort

of

FX

option

functionality to our platform.”

of

hedge

Celsing.

information

extensions

“It

directly

is

or

certainly

from

our treasury management Larger institutional investors certainly

system.

appear open to the idea. Although FX

automate strategy models,

options are a relatively small part of

such as trend following or

Skandia Capital’s overall FX activity, they

cost of carry. I think some

still represented some $3bn of its FX business in 2005. “Our option trading tends to be rather intermittent, but the

form

We

of

could

FX

also

trade

automation could possibly be the next step for us.”

ability to trade FX options online could be valuable, especially if it was possible to straight through process the trades,” says Skandia’s Celsing. Although Ericsson Treasury was one of the first corporates to trade FX options online some five years ago, Stefan Daberius doesn’t regard this as a critical capability. “It is more important to us for a platform to include most of our core relationship banks rather than to have the most technically advanced capabilities,” he says. “Our option volumes are also not huge and would be unlikely to exceed 10% of our volume by transaction count.

january 2006

e-FOREX

67


Scandinavian FX – wired and getting more so

Vendors have also realised the potential need to support this type of automated activity on the trading desk as well as at the portfolio level. “I think we will offer this sort of automation capability in the future,” says Orc Software’s Gidlund. “We already have the functionality to populate an FX order ticket with the aggregate exposure automatically, so automating the final step of clicking ‘send’ is not difficult. However, rather than simply automating the hedging of every single trade, it would perhaps be of more use to allow the trader to specify their own automated aggregation rules, based on time or size and perhaps also rounding.” However,

some

organisations

are

rather

less

enthusiastic about the concept of trade automation. “Technically, it would be perfectly possible to do this, but much of our hedging is still done on a forecasted basis (of the balance sheet),” says Ericsson’s Daberius. “That means we have to have a human element anyway in terms of determining the desired hedge ratios and other market factors. We couldn't practically replace that with an end to end automated process.” Making not taking

Finally, it is evident that the buyside in Scandinavia is also following the evolution of order driven FX markets with interest.

Technology vendors are already

responding to this interest. “We currently have links to five single/multi bank FX portals,” says Orc Software’s Gidlund. “We are now in the process of adding a link to Hotspot, as we believe clients will welcome the opportunity to post their interest.” Skandia Capital’s Celsing is certainly intrigued by the order driven concept. “The opportunity to make rather than just take prices is obviously attractive,” he says. “In general, I think a fee based model rather than paying the bid/offer spread makes good sense. Given the scale of our operations, the price improvement this makes possible could make an appreciable difference to the bottom line.”


E -ARKETS

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viewpoint 70

january 2006

Pulling in the reins offering liquidity on a selective basis

S

imply put, the liquidity mirage occurs because for all the enormous size of the FX market, it

actually supports less liquidity than is on offer on all the single- and multi-bank FX portals. The underlying interbank market may be showing a bid at a price in say 10 million EUR but this price is then used as the foundation for banks’ pricing engines which offer say 30 million at that price through multiple channels. Therefore clients with 5 banks’ offerings in front of them may be seeing EUR 150 million all based on the same 10 million EUR bid.

Clearly, this situation could lead to a “Black By Philip Brittan, Bloomberg L.P

Monday”-like scenario, in which a large portion of that phantom liquidity is hit simultaneously, and

There is a subtle yet dramatic

the 10 million EUR bid in the interbank market

change occurring in the FX

liquidity risk which has the potential to ignite a

world. Banks are taking

instantly collapses, leaving banks with catastrophic

systemic risk powder keg and at the very least would lead to a large credit crunch.

back control over the This scenario has not come to pass, and perhaps

provision of liquidity in the

never will. But the increasing leverage inherent in

face of increasing risks and

the liquidity mirage, combined with the ability of

decreasing margins.

liquidity at once through multi-bank portals and

Banks are taking control by pulling liquidity from multibank portals and focusing on channels that support a

buy-side customers to tap multiple sources of

APIs, increases the risk that it may.

Feedback loops The more common scenario is that interbank prices are constantly moving away – subtly, not catastrophically – from the banks’ positions as they are hit by customer demands on their liquidity.

direct relationship with their clients. And one of the major risks leading to this change

This problem has been further intensified by the rise of “feedback loops” in the market, where hedge-fund customers post prices on anonymous marketplaces, such as EBS Prime or HotSpot, that are in fact based on prices the hedge fund sees

is the “liquidity mirage”.

e-FOREX

coming from a bank’s own portal.


Viewpoint is a column in e-Forex where we invite organisations, companies and individuals to comment on eFX and FX trading issues. Please feel free to write to us with your own views on these contributions as well as suggestions for other topics.

inefficiencies in the banks’ ecommerce systems.

all of their positions on these exchange-like

A corollary is that banks have been pulling their

environments, and as they do so they can find

liquidity from multi-bank portals, particularly

that they are chasing in their own tails, as the

anonymous ones where the liquidity mirage is

liquidity they are trying to access is in fact their

most likely to be exacerbated and where the

own. Although trading volumes have increased

banks don’t receive any benefit from direct

in recent years, as increased transparency has

relationships with their customers. What’s more,

facilitated the trading of FX as an asset class in

banks trading on these multi-bank platforms

its own right, true liquidity has polarized around

have to pay commissions in an environment

fewer key providers.

where the thin margins don’t support additional transaction costs and the risks are high.

Narrowing of spreads A related phenomenon has been the massive narrowing of spreads we’ve witnessed in the FX market. This is the result of intense competition, especially on multi-bank portals, which have led banks to offer tighter spreads in order to see the flow they require. Lesser credits are now trading at top credit prices with no penalty.

Thus there is a growing feeling that current

Focusing liquidity on fewer channels The pendulum is swinging back, and we are likely to see banks working to change the perceived supply/demand balance by focusing liquidity on fewer channels, specifically their own Web sites and no-commission singlebank vendor channels such as we offer on Bloomberg.

spreads do not compensate banks appropriately for the significant liquidity risk and credit risk they take on. Wider spreads would give banks cushion to absorb the risk in a customer-driven position while retaining some profit.

To maintain a relationship-driven world, banks will need to offer innovative, high-value services to convince customers that they are better off bringing their needs openly to their bank rather than trying to go it alone on a multi-bank

One reaction to this is for FX to focus on its

marketplace. As Chip Lowry pointed out in the

relationship-driven roots. Many banks and

October Viewpoint, “best execution” is not

customers view FX in the context of their larger

simply about stacking up price providers and

banking relationship, which also includes

choosing the best one; that practice may in fact

custodial, treasury, or prime brokerage services,

work against the price taker.

for which the customer is more dependent on the bank and the bank has the opportunity to earn

Customers should be prepared to see wider

more margin.

We have witnessed a growing

spreads in the FX market, but should also expect

willingness of banks to turn away business that

to see a corresponding increase in innovation

they don’t see as “legitimate” or that is too

and value-add on bank Web sites and vendor

aggressive, i.e. “snipers” who simply arbitrage

single-bank portals.

viewpoint

Banks themselves have started to offset some or

january 2006

e-FOREX

71


Welcome to the real time ® EZCURRENCY technology TF Network, Inc. is a US based company that was established in 1998 in the State of Delaware. It primarily provides transactional (EZCURRENCY®, real-time trading) and informational (EZC ProCharts™, real-time charting analytical) technology. TFN clients are mostly at B2B level, including: Financial Institutions, brokerage houses in the US and abroad, professional money managers, etc. All technology is built following Banking and FDIC requirements and is available in several languages.

• Secure Server-side Core with several back-up servers:

Server-side Core is a Functional system. This precise functional engine manages all transactions and notifications through the Internet with the trader's and dealer's front-ends. The client side can connect to the core directly or via a proxy, which is important for companies who implement high-level security policies. This engine works with the trading system databases in real time. The fact that it is able to work with remote databases as well as with the local resolves very important fail-

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• TFN provides an existing Business & Technological clearing capability to the most well known liquidity providers (technologically TFN’s Dealing side could be connected to the Dealing desks of several major liquidity providers through their APIs) • TFN will provide real- time Inter-bank data feed capability coming from the major liquidity providers • 24 x 7 operations from Sunday 5 PM through Friday 4 PM. EZCURRENCY® TRADING PLATFORM

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EZCURRENCY® is a user-friendly tool, reliable trading system with no interruptions (with back-up servers) and Java push technology. The platform consists of the 4 vital parts: Client, Dealer, Server –side Core and Back-office components. EZCURRENCY® API

EZCURRENCY® API is an interface to EZCURRENCY® trading platform that provides B2B customers with the ability to connect their trading systems and end users directly to the central platform. Through the API they can get tradable instrument quotes and the trading capability. EZCURRENCY® API provides a real-time online multilayered financial transactional and informational network with multiple clearing levels. EZCURRENCY® technology is the fastest real time data application available and is backed by advanced security features. EZCURRENCY® is fully customizable and complete with tools that provide flexible and precise solutions in Spot Foreign Exchange including:

72

january 2006

e-FOREX

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TF Network, Inc. transactional and informational technology brings valuable advantage to its clients, especially with Private Label capability. With your own private label, TFNs real-time currency trading technology and EZC ProChartsTM analytical tools can be marketed as in-house technology under client's own flag to individual customers, independent traders and fund managers; via your company website or through a network of Introducing Brokers. EZC ProCharts™

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Sponsored Statement january 2006

e-FOREX

73


The e-Forex Roundtable Squeezing efficiencies â&#x20AC;&#x201C; where will the benefits of eFX be focused next? With H. Harry Moumdjian VP, Global Foreign Exchange Electronic Trading Services at Bank of America, Lynn Kennedy, Managing Director, FX Sales, at BMO Nesbitt Burns, Rita Saverino, Director of FX e-Commerce at Deutsche Bank, Ruth Mackaman, head of e-FX Marketing and Product Development at Brown Brothers Harriman and Nick Barker, FX e-Commerce Programme Manager at UBS. Up to now, the application of eFX

Kennedy: An opportunity exists to make FX

part of the Prime Brokerage services they

technology has really been concentrated

effortless for the client. In an ideal world,

provide to their clients that use them for

on the point of execution. What areas of

our technology talks seamlessly to the

credit

the FX pre and post trade environment do

systems of every client and we simply

However, there is still more room for growth

you think still offer possibilities for

upload trade information and send out a

by automating this part of the workflow

exploiting the benefits of automation?

payment. Possibilities for further growth

across client segments. For example, Real

in automation exist in e-Orders, e-dealable

Money accounts do not necessarily need

Options and e-Conformations. The norm

the credit facility of PB but do need to have

has become to simply be able to provide

third party notification, trade averaging and

on

those

trade settlement to be automated. Looking

differentiate

at the pre trade processes, there are some

themselves in this space will automate the

portals/ ECNs that provide pre trade account

full trade (start to finish) in addition to the

selection and allocation; however, there is

standard â&#x20AC;&#x153;mine/yoursâ&#x20AC;? capabilities.

still room for growth and standardization for

Moumdjian: There is a greater degree of variability among Pre-Trade automation requirements, while Post-Trade needs are more likely to be uniform across client segments. Pre-Trade features that have yet to realize the full benefits of automation

line

providers

execution, attempting

however, to

include the STP of transactions from client side order management systems directly into execution engines.

and

operational

efficiencies.

these processes both on the sell side as well Saverino: As electronic volumes grow, there

as the buy side.

Such processes

will continue to be the need for automation

coupled with post-trade STP will allow

of post trade processes such as trade

Mackaman: As eFX trading matures,

clients to complete the entire trade process

averaging, trade give-ups, trade matching,

secondary areas for automation benefits

with a single keystroke, or potentially invoke

trade allocations, and auto rolling of

include: pre-trade aggregation, post-trade

an entire systematically triggered process.

positions. Currently banks do this mainly as

allocation, real-time trade confirmation,

Rita Saverino

Lynn Kennedy H. Harry Moumdjian

74

january 2006

e-FOREX


Fundamental

functionality

As more and more execution venues become

the client’s order management system to send and receive trade details electronically.

including auto-confirmation, electronic

available to clients, it becomes even more

deal tickets and online settlement are basic

important that all executing banks have a

One efficiency that is lacking in the eFX revolution is a common interface between

needs of most customers.

standard and automated process to give up

the buy-side and FX providers. A potential benefit as the buy-side moves towards multiple bidding platforms is a standard

post-trade

>>>

electronic reporting, and interfacing with

And, clearly

online execution is required. Pre-trade

those trades.

needs can vary dramatically since these services need to be incorporated into the

interface to enable the buy-side to deal with multiple FX providers using a

client’s decision-making process.

common format over various platforms.

Kennedy: The busier the client, the more automation he or she needs. STP will win

Mackaman: We see an enormous variety in the degree and type of customer automation demands. particular,

need

Tokyo clients, in

extensive

post-trade

automation for confirmations (duplicate MT300s and spreadsheet confirmations)

Barker: To offer true efficiencies eFX

business from clients willing to pay for this

and settlements for custody and 3rd party

technology needs to provide benefits throughout the entire deal life cycle. At

convenience. We find this to be a common

FX (MT202s to the FX bank rather than

request by those clients looking to further

standing settlement instructions.) Global

automate their business.Our larger clients

continues to expand and increasingly complex products added. The pre trade

investor clients often require both pre-

have a need to consolidate the number of

trade

eFX technology requirements include those to support clients who are program

automated systems rather than sign on to

integrate their portfolio management

another proprietary site. The more we can

systems into the FX providers’ trading

traders and require market data and price

demonstrate that our system is adaptable

systems, net trade details and allocate back

feeds from numerous sources. Post trade requirements include the in-sourcing of back office functions.

to their own deal capture system (possibly

to the client’s portfolio system.

the point of execution eFX technology

post-trade

automation

to

through an API), the less manual inputs are required by the client and their own back office. The easier we make it for our client

Is there a broad consensus amongst your own clients about where in the trade cycle they would most like to see improvements in automation, or are some customers

and

is a direct result on how we simplify the dealing process from start to finish.

Barker:

There

seems

to

be

general

consensus amongst segments or groupings of clients but different segments of clients have different requirements e.g. high volume active trading clients are more concerned about a high performance streaming API and

Saverino: Broadly speaking clients want

real-time STP connections, whereas other

quicker trade give-ups, trade matching, trade

segments

allocations and trade averaging across all

requirement. As with traditional client

Moumdjian: Clients appreciate tailored solutions, and in our experience it’s rare to

their trades. They need this not only from

relationships these differences must be

their Prime Broker but across all of their

addressed, as the ‘one size fits all’ approach

find a one size fits all solution.

executing banks.

is no longer acceptable.

much more concerned about particular “pain-points” than others?

may

not

have

the

same

Ruth Mackaman Nick Barker

january 2006

e-FOREX

75


The e-Forex Roundtable

Rita Saverino

Lynn Kennedy H. Harry Moumdjian

As

corporate

The automation of Foreign Exchange

The latency issue has become critical for

governance burden continues to increase

the

regulatory

trading has two main advantages. Firstly,

some clients who have embraced program

with the arrival of standards such as

straight-through-processing reduces the

and model-based trading and data latency

Sarbanes

how

number of controls by eliminating all

in the e-commerce environment can now

important will it become to extend the

unnecessary manual intervention. Secondly,

make the difference between making and

benefits of FX STP and automation by

electronic controls can be monitored and

losing

integrating it into other processes and

documented automatically, reducing both

transactions, for example payments?

time and the risk of error. STP can only be

Oxley

and

and

IAS

139,

achieved through the standardisation of the Moumdjian: Automation brings several

transactional process between clients and

features

their executing banks, and of the settlement

useful

in

compliance

with

money

on

transactions.

How

important is the speed and quality of pricing engines likely to be in helping FX providers maintain competitive advantage and in what way will banks be looking to improve the robustness and quality of their rates?

Sarbanes Oxley, IAS 139 and other

processes

accounting and regulatory standards.

settlement banks and clearing institutions.

First, electronic processing can bring

Once the whole trade life cycle of initiation,

Moumdjian: Maturation and sophistication

standardization which makes the execution

execution, confirmation, netting, settlement

of pricing engines are essential for long-

process easy to explain and document

and

term success in the eFX and overall FX

and to confirm adherence.

information can then automatically update

business.

reporting is usually far superior to manual

all

changing, and legacy bank systems cannot

processes. Third, many systems provide

accounting processes.

Second, the

between

reconciliation, relevant

risk

clients

is

and

their

achieved,

management

the and

keep up with the leaner infrastructures of

controls around who can transact, who can settle and who are notified.

model-driven trading.

Banks continue to

Mackaman: eFX systems have become

shave milliseconds off round-trip times and

even more important in the light of

are

Kennedy: It is important that a clear audit

increased regulatory burden placed on

measures

trail is available and STP provides this

treasury departments by recent accounting

gap.

effectively.

and reporting rules such as Sarbanes

Automation will decrease

The marketplace is rapidly

operational risk and the manual processes

Oxley, FAS 133 and IAS 139.

could affect the integrity of the financial

electronic systems can help facilitate

transaction.

compliance with these regulations, much

While

of the burden still falls on the customerâ&#x20AC;&#x2122;s Saverino: The Sarbanes-Oxley Act seeks to

in-house information systems where much

improve the system of financial reporting by

of the required information resides.

incorporating to

risk

balance

management some

of

this

Clients understand this and are

working with banks to optimize trading relationships. This leaves banks and clients in a position to expand relationships as more robust engines go into production. Kennedy:

Our

pricing

engines

have

become very important to our clients.

reinforcing the checks and balances that are increasingly

Where initially a system failing was

series of accounting standards that limits the

important; STP by its true definition should

considered only an opportunity loss, it now

ability to net positions. This inevitably leads to

encompass the whole front to back process

can seriously affect the client relationship.

an increase in transactions and to an increase

including payments and not just sub-

Clients have to count on us to be up and

in the operating risks and financial costs.

sections of the process.

running with a competitive price and a

critical to investor confidence.

76

january 2006

IAS 139 is

e-FOREX

Barker:

It

will

become


>>>

Squeezing efficiencies – where will the benefits of eFX be focused next?

Ruth Mackaman Nick Barker

dependable payment. Integration of One-

discovery but also an applied process that

enhance our client offering with greater

Click trading and multi-bank portal pricing

involves post trade services such as real

advisory project work rather than a strict

has addressed latency issues in pricing.

time trade confirmation. Is Best Execution

automated relationship.

likely to play a key role in stimulating Saverino: Minimizing latency by configuring

efforts to improve automation in the FX

Saverino: Best execution is not only about

networks correctly and having an efficient

trading process and if so where will these

dealing at the best price; it’s about capturing

pricing engine is very important and will

efforts likely be focused?

continue to be very important.

the efficiencies in the whole trade cycle. Because commoditized products tend to be

As black

transaction

cost

sensitive,

other

key

box trading models continue to grow in FX,

Moumdjian: In today’s highly transparent

it will be critical for banks to constantly

FX market best execution is easier to find

optimize the whole price delivery cycle from

than ever before. Automation has allowed

how and where they source prices, to

clients efficient price-discovery options,

the price setting and delivery, trade

and seamless execution. Improvements in

Any post trade automation whether it is

acceptance and trade booking and finally

automation will allow clients to make

rolling the trade to a new date, multi trade

risk management.

necessary amendments to settlement or

averaging,

allocation instructions or add any special

cancellation and re-booking functionality

components in addition to the price are the overall speed and reliability of the platform, the speed of connectivity, the speed of execution, and the certainty of outcome.

trade

give

ups

including

instructions to the handling of trades

that allows a trade to be rolled to one date,

commerce environment are vital and

without

is what Best Execution is about.

pricing engines require constant oversight

rebooking processes.

to insure optimum pricing. However, service

approach to better execution is not

Mackaman: We agree that price discovery is

transparent in “price” alone.

vital to our global investor clients. Multi-

Mackaman:

Speed and quality in the e-

and quality of price “trumps” speed. Quality

cumbersome

booking

and

This value added

bank platforms have successfully delivered

of rates is paramount whether pricing is over a rate engine or from the trading desk.

Kennedy: Although FX is important to us, it is not the sole importance for our clients. It is

price transparency to the marketplace via their competitive bidding feature. However, we believe there is more to best execution

Barker: The speed and quality of pricing

often only a part of a larger transaction. The

engines is absolutely paramount and will

more automated we can make it for clients

continue to be a major differentiator.

the more they will prefer our system. Having

Further

by

a competitive price is a given, but clients

measuring the current effectiveness and

want ease in their trades and they are willing

looking at areas that will allow milliseconds

to pay for this convenience. One-click trade,

of channels, trade time stamps, audit

to be shaved off.

tight spreads and respectable limits in the

logs, and trade search/export features. In

majors are now a standard. Those unable to

addition, a demand by index managers and

Achieving Best Execution is another major

offer these automated solutions will be left

clients for benchmark execution has led to

consideration for many clients and some

behind. As automated dealing has become

trading platform variations to provide

definitions of it encompass not just price

more of a commoditized service, we look to

intraday fixing rates directly to the client.

improvements

will

come

than just price discovery and it is apparent that FX desks are striving to incorporate these with improved automation. Examples of features that complement price discovery are: real time confirmation through a variety

january 2006

e-FOREX

77


The e-Forex Roundtable Kennedy: As this requirement grows, we

Barker:

have found that information (to urge trading

providers need to constantly adapt to

decisions) has become quite abundant.

ensure they continue to meet client needs.

Research tends to be best retrieved (rather

Traditionally a lot of the research, flow and

than mass e-mailed) off our intranet site and

decision making tools have been delivered

Flow Info tends to be sent directly to

via a GUI.

customers due to its timely value.

increasingly looking for this information to

As

in

any

dynamic

market

Now we are seeing clients

be delivered via an API or via one Saverino:

Research,

charting

tools,

structured products, hedging solutions and

integrated

platform

that

they

easily

integrate with their own platforms.

other pre-trade services some examples of value

added

services

that

banks

traditionally offered their clients. Broadly speaking, in the systemic electronic arena

“Clients appreciate tailored solutions”

Investors,

Hedge

Funds,

CTAs,

and

electronic trading shops build their own internal research and trading models. However the latest market participants that offer on-line FX to the “retail market” do

Barker: Best execution efforts will be

offer their client base, market research,

focused around ensuring that the rates that

charting services, and risk management

the clients trade on are meeting their

tools to help the client make their

fiduciary responsibilities to meet “best

trade decisions.

execution”.

This can be achieved in a

number of ways and banks may need to

Mackaman:

support several methods of allowing the

tremendous interest in information that

client to achieve “best execution”.

In

enables them to make decisions in

terms of improving automation in the FX

constantly changing and complex markets.

Clients

have

shown

definitely

We have seen growing demand for flow

improvements that can be made to allow

data as well as a ramp up in interest on

clients to adopt “best practices” rather

trading ideas and research specific to

than “best execution”.

investment mandates.

trading

process

there

are

These best

This information

around

should be well organized and provided to

increasingly seamless integration with

clients freely and easily. Currency strategy

practices

will

be

focused

their own systems and a reduction in the human intervention required to trade FX.

is becoming one of the remaining factors to differentiate FX providers. Rather than producing academic research, strategists

Many new participants in the FX markets are

undertaking

transactions

more

requiring

complex

sophisticated

research and decision support solutions. Is

must

become

more

“there will continue to be the need for automation of post trade processes”

client

focused,

knowing the client’s needs in order to provide useful, timely information that the client can act upon.

With growing FX market volumes, do you anticipate the eventual automation of virtually all Risk Management processes and could you envisage a situation where the human element has been removed almost entirely from this equation? Moumdjian: The human element will always exist in the risk management

this creating a need to improve how the e-

process. Routine transactions will become

channel is used to provide sophisticated

more automated on both the bank and

research,

client

flow

information,

decision

sides,

but

risk

management

making support tools and trading ideas

decisions will always be necessary. People

and in what ways can you see FX providers

will not be out of this process, but what

meeting this challenge?

they do may evolve.

Moumdjian: Analytics are widely available

Kennedy:

over the e-channel and sophisticated tools

completely eliminated with STP and this

and flow information are also provided by

will become increasingly more important

most large institutions.

The challenge is

for fund managers and high volume buy-

navigating the abundance of information.

side clients. Algorithmic trading already

Detailed,

supports this type of automation.

easy-to-use

websites

create

Operational

risk

is

almost

efficiencies for clients, allowing them to Saverino: For the commoditized products

conduct research as they see fit. Even using e-tools, consultation with bank client teams is still necessary in complex transactions.

78

january 2006

e-FOREX

“Automation will decrease operational risk”

such as spot, swaps and increasingly more vanilla options, there will less of a human


Squeezing efficiencies – where will the benefits of eFX be focused next? involvement in both the pre and post part

pricing and risk management capabilities.

of the trade cycle.

The post trade

The remaining spot traders are increasingly

operational aspect of the trade which has

becoming flow traders and monitoring and

to do with booking, matching, and give up

reacting to the flows from different channels.

of trades will be fully automated.

STP will

continue to be the driver so that both the

Many customers look to their banks to

bank and the client will have a virtually

provide

hands- free post trade process.

The

example, fund managers may want to

transactional part of the human element

develop better integration between FX

will be less and less as well, and both

platforms and their own front-office order

banks and their clients build more black

management

box trading models.

settlement services such as CLS. Ultimately,

connectivity

solutions.

systems

and

also

For

with

should this be down to banks to finance or Mackaman:

We

have

witnessed

a

are there other ways providers can ease the

significant move towards automation on

burden for clients who may not have a large

trading platforms in this industry, and we

budget or resources to assist them?

haven’t seen the end of it. relationships

continue

However, the

Moumdjian: Competition in the market will

business. As part of client service and

drive vendors and providers to integrate

relationship management, FX providers

pre

would be well served to continue to

Standardization will drive the cost down for

Mackaman: It’s good business for the

maintain

their

all, but as I said it can be difficult to

customer and FX provider to partner in the

Even with 360 degree STP,

find a one-size-fits-all answer. Integrated

development of technical solutions. In

clients want to know that a trader or

solutions will become a differentiating

most cases, the cost of implementation is

relationship manager is there to help them

factor that will lead to greater market share.

funded by the FX provider with the

manage their risk. As markets continue to

Early providers will capture market share,

anticipation that it will be offset by a gain

evolve and become more sophisticated,

and this may help finance the development

of a customer’s share of wallet. CLS is a

the personal relationship between the

burden. In the end, participants on both

good example of a product that is

client and the FX provider will continue to

sides will end up sharing some costs.

prohibitively costly for the client to

“touch

customers.

to

“The speed and quality of pricing engines is absolutely paramount”

points”

drive

with

and

post

trade

operations.

be vital. The human element is especially

develop.

FX banks are providing third

critical during volatile markets and when

Kennedy: This has been a conundrum since

party CLS service without pushing the

the client requires discretion to work

the first system was installed.

Sell-side

development costs out to the clients. On

larger deals.

firms have no choice but to be part of the e-

the other hand, there are instances where

commerce

clients.

the client may pay a small portion of the

Barker: If you look at UBS over the last 5

Smaller institutions have an option to white

overall development costs for connectivity

years we have seen the number of spot

label another provider’s system and draw

solutions

traders decrease from around 80 to about

efficiencies from their economies of scale.

dramatically more expensive to build in-

30 today.

This efficiency gain has been

As more firms put a price on volume, the

house.

delivered through increasingly sophisticated

expense of this automation will be shared

Infomediary®, a communication platform

as designated in longer-term contracts.

that

evolution

or

lose

that

would

have

been

One example of this is BBH enables

customized

message

mapping and data translation. While there the

is a one time set up fee and maintenance

electronification of FX is one where clients

costs, the total expense to the client is a

will be more sensitive to their desk top real

fraction of the burdensome costs of hiring

estate

in-house

Saverino:

and

The

will

next

want

wave

to

streamline the FX component.

in

completely Although

communication

experts

for

development and support.

we saw the beginnings of this trend with the

“Speed and quality in the e-commerce environment are vital”

onset of some of the FX multi bank portals

Barker: This comes down to a client choice.

in the last few years, this will continue to be

There are banks willing to finance these

more of a theme as more if not all of the

connectivity solutions and many pursue this

Order Management Systems and Corporate

route

Exposure Management System, will be

themselves and provide bespoke solutions

asked by their clients to integrate FX.

often at minimal or no cost. If the client

Banks have to be flexible with their APIs and

chooses a “provider” then they may be

will need to be able to support multiple

constrained by what the provider is willing

connections into multiple OMSs and EMSs.

to provide; there needs to be some resale

This connectivity combined with the back

value in the work or service that they deliver.

end STP discussed above will give clients

This route may be more expensive but it

cost efficient access to FX.

doesn’t tie the client to one particular bank.

so

that

they

january 2006

can

differentiate

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79


Treasury Best Practice – the role of FX automation

>>>

Keith Hill

Best execution - a fundamental part of best practice Best execution may have become a fundamental part of best practice in FX trading, but there is still considerable disagreement about how to define it. Keith Hill, Head of Sales, EMEA at FXall, argues that it goes far beyond best price to encompass a wide range of factors from banking relationships through to compliance.

B

est execution is increasingly important for corporate treasurers for many reasons, including

the desire to enhance performance and save money, and the shift in the treasury’s role from administrative to strategic function. For treasurers, achieving best

However, while competitive pricing is an essential component of best execution, sophisticated treasurers are taking many other factors into account, including banking relationships, straight-through processing, compliance, and the management of FX flows.

execution has a direct and demonstrable effect on their company’s performance. While asset managers

The price is right…

are saving money on behalf of their investors, every

The FX markets are becoming more transparent, and the ready availability of market data and the emergence of multibank trading portals mean it is now easier than ever to identify and deal on competitive prices. Treasurers have embraced the multibank model – research from Greenwich Associates shows that of those corporates that trade electronically, that almost two-thirds (62%) use a multibank platform that allows them to receive and compare prices from multiple banks simultaneously.

cent a corporate saves on an FX transaction has an impact on the bottom line. Despite the considerable attention best execution has received from market participants, industry analysts and the press, there is still little consensus over what it comprises. To some, best execution simply means executing on the best price when sourcing multiple prices for a single transaction.

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Treasury Best Practice – the role of FX automation

To achieve consistently competitive prices when using a multibank platform, corporates need to have a best practice policy in place that details when to compete trades, and how many banks to request prices from. Typically, a treasurer might request prices from two to four banks. This is enough to get a good range of prices that reflect the market at the time of trading, without opening the deal up to the whole market and thereby removing the banks’ incentive to compete for the deal. When it is most important to be able to trade a large amount quickly and discreetly, without moving the market, corporates will often decide that a trade can be executed most effectively by dealing with a single counterparty. This decision is affected by several factors, including deal size, time of day, market sensitivity, and the depth of liquidity in the currency pair being traded. Once this decision has been taken it is important to be able to justify it, to prove that the price achieved was competitive compared to the market rate at the time of execution, and that the executing bank merited the business. Online trading platforms have made this far simpler with reports that benchmark the price achieved against the indicative market rate, enabling users to prove they achieved justifiable execution even when dealing with a single counterparty. Comprehensive reporting that enables corporate treasurers to analyze their banks’ performance by product, currency pair, response rate and hit ratio really highlights which banks are prepared to go the extra mile for their clients. …but relationships are important too

For most corporates, best practice in foreign exchange is linked to banking relationships. Perhaps more than any other type of market participant, corporates have extremely strong ties to their liquidity providers. The supply of credit in the form of foreign exchange and money markets lines is just one component in a wide-ranging relationship that encompasses structured deals, advisory, corporate finance and M&A-related activities. Foreign exchange flow is sometimes used by corporates to reward banks for other services. For this reason, sharing out flow between providers can be an important criterion in the corporate definition of best execution, provided that the prices on which they execute are fair and justifiable. Trading FX as part of a broader relationship also has another advantage. If a corporate has a strong relationship with the provider they are trading with, they will often get much faster, tighter pricing than they would otherwise. Many participants who have traded both on anonymous and relationship-based platforms report that both liquidity and pricing are better when dealing through the latter, since relationship banks are more willing to execute large trades at tight prices when dealing with a known, trusted client.

Automating the trading process also makes it far simpler to comply with regulations such as the U.S. Sarbanes-Oxley Act. According to recent research by PricewaterhouseCoopers, more than half of corporations report that streamlining and automating controls can significantly reduce the cost of Sarbanes-Oxley compliance. It is also important that any vendor a corporate treasurer chooses in this respect has undergone suitable due diligence. An up-to-date SAS 70 certification from a reputable auditor is a key requisite. Over the long term, companies that stick to manual processes will find it increasingly costly to document and test controls to the standards required by the new legislation – another way in which a manual trading process ultimately costs far more than an electronic one. Internal dealing and netting tools deliver economies of scale

So far, we have looked at how to minimize transaction costs and optimize pricing on a deal-by-deal basis. The final component of best execution concerns maximizing efficiency by consolidating and netting FX order flow. Executing deals of ‘normal market size’ is much more cost-effective than trading frequently in tiny amounts. Many larger corporates are now developing regional or even global treasury centers, which allow them to centralize and consolidate internal FX flows before netting them and trading the net amount externally. Such centers demand 24-hour coverage from their banks and multibank portals, and require expertise in a wide range of emerging markets currencies. As well as delivering economies of scale, the trend towards centralized treasuries also gives treasurers tighter control over the trading process, making it easier to comply with regulations such as Sarbanes-Oxley. The introduction by the International Accounting Standards Board of IAS 39, which requires every hedge to be tagged to the exposure it is hedging, initially seemed likely to make it more difficult to take advantage of netting. Many companies currently are forced to do all their hedges externally on a gross basis in order to secure more favorable accounting treatment. As well as being more time-consuming, this significantly increases the cost of trading. Fortunately, solving this problem is now simple with new technology that enables corporates to net hedges and trade the block amount with their providers, before splitting the trade out again internally. In this way, they get the benefits of hedge accounting without sacrificing the cost efficiencies of trading on a net basis. Companies can invest to build this technology themselves, or use one of the solutions available through platforms such as FXall. Conclusion

Automating the way to compliance and better execution

When calculating cost savings, you need to look at more than pricing. Today, most corporate treasurers look at overall transaction costs when assessing best execution – these include pricing, the cost of trading and processing transactions, and the potential for costly errors. Electronic systems reduce transaction costs and operational risk by transforming a series of manual steps into a seamless, automated process.

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Best execution, then, is not about price alone. While pricing is important, so are overall transaction costs and the appropriate direction of flow according to banking relationships and credit exposure. Corporates are also starting to look beyond pricing and cost per trade to implement more effective ways of managing their FX flow. The online trading, reporting and workflow management tools that have emerged over the last five years have been invaluable in helping them to do so.


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83


eFX and Best Practice in the Treasury environment. Heather McLean canvasses the views of several leading international companies on the best practice advantages for their treasury departments of using eFX technology.

I

n treasury, showing best practice in the

Best practice was also unimportant for

use of electronic foreign exchange is

Lufthansa. However, this was because

now a vital aspect of day to day life.

when the company began e-trading, there

Increasing regulation is the main driver for

were no best practice guidelines available.

this, with the need for added transparency and traceability on every aspect of a deal.

Axel Tillmann, head of treasury at Lufthansa, says: “We were the first

However, many organisations did not set out one day with the intention of achieving best practice guidelines on eFX; for some, best practice has been a welcomed side effect of bringing eFX trading platforms into their organisations.

company trading with 360T, back in May 2001. We have helped 360T develop its system.” Yet he adds: “Today, best practice is very important for us. We share best practice with other DAX companies in a local treasury circle.”

Heather McLean is a freelance writer.

Although Bertelsmann’s treasury has achieved best practice through eFX, best

Online trading

practice was not the reason it began using

eFX is becoming more prominent in

the technology. Stephan Scheller, senior

people’s minds. This has led to a focus on

vice

president

for

treasury,

in

the

corporate treasury and finance division of Bertelsmann, explains: “It was not our aim to achieve best practice. It was our aim to achieve best work flow. The esystems and interfaces really help us to

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eFX best practice. Online trading is having a massive effect on the improvement of best practice, with best execution through added

price

transparency,

liquidity,

operational efficiency and flexibility, as

save time to spend on improving other

well as the ability to easily manage and

aspects of our daily work, such as

track

advising our subsidiaries. Time saving

Automated FX practices give treasury

was our goal, and best practice has been

departments the control over their trades

a side effect.”

and the compliance standards they need

deals

for

auditing

purposes.


>>>

Treasury Best Practice – the role of FX automation

to hit best practice targets, and to define

At Textron, trade details are automatically

those targets further. Lufthansa has found

passed from the FXall trading platform

being able to have up to 10 quotes on the

into the FXpress FIRSTTM system database,

screen at any one time has not only made

then directly from FIRSTTM into the FXall

getting the best price far easier, but it has

Settlement

also cut down on the number of people

electronically

required to trade, according to Tillmann,

Center,

where

confirms

the

Textron financial

details and settlement instructions with its FX banks.

providing further efficiencies. At Aegis, eFX has helped it increase best practice throughout the organisation.

Bob Hemstreet comments: “Having the ability to store settlement instructions in the system and pass them electronically

David Grinnell, group treasurer at Aegis,

through the FXall Settlement Center

comments: “We can handle everything

makes the process easier. It eliminates

with much more transparency, as we can

mistakes that can easily be made by

see things such as our netting and

giving details over the phone.”

aggregation

opportunities,

without

having to be more involved centrally. This

Royal

means we can build a much better view of

the Currenex platform for trading in

our trading requirements globally, giving

the

us a picture of how to improve our current

treasurer at Royal Swets and Zeitlinger,

trading practices.”

states: “Our goal here is to have state of the

Automated online FX trading has also greatly improved best practice at Textron. Bob

Hemstreet,

Assistant

Treasurer

Global Treasury Operations, says: “Our entire process including both FIRSTTM and

Swets

treasury.

art

and Bert

treasury

Zeitlinger Kors,

uses

Stephan Scheller

“The advantage of e-trading means we receive more quotes from more banks, versus transactions over the phone”

corporate

department

and

processes, policies and systems. eFX helps us in achieving efficiency in the trade execution process, being able to select the optimal quote from multiple banks at the same time, and in the confirmation process.”

FXall is much more reliable, time efficient, and cost effective. There is no wasted

Kors adds: “For a treasury department,

time on telephone conversations, the

eFX technology helps in the trading

accuracy of the information including

process, as it’s best practice in the

Axel Tillmann

trade details and settlement instructions

industry to use such a system rather than

is much more reliable.”

calling several banks on the phone.

“We share best practice with other DAX companies in a local treasury circle”

january 2006

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85


>>>

Treasury Best Practice – the role of FX automation

Now it’s just looking at Currenex on the

The most annoying piece of this was the

screen and selecting the best price from

paper based confirmations from the bank

your counterparty banks. Then you’re

that generally would come in days or

able to show the results because of

weeks later, which meant going back into

performance analysis and reporting, so

our system to confirm the details.”

you can analyse your counterparties in terms of the trades they’ve won and the

Swiss Postfinance uses 360T as its

number

preferred eFX platform provider, along

of

requests

they

haven’t

responded to.”

with FXTrader for spot FX. Achieving best practice is key for Swiss Postfinance’

David Grinnell

eFX allows the Bertelsmann treasury

treasury activities. The company does

department to go to market on lower

proprietary trading including FX, so finds

amounts. In the past, Scheller says the

eFX technology vital in enabling it to hit

company had to deal huge FX amounts in

best practice targets.

one ticket, but now with e-devices, it splits

“eFX allows us to show the whole range of qualitative decisions that you apply to a trade.”

its deals down to a series of lower amounts, which reduces the deal risk.

Markus Fankhauser, head of FX trading and sales at Swiss Postfinance, states: “Using eFX technology makes our work

Confirmation matching

very

comfortable,

particularly

for

matching and settlement. To back it up, Confirmation matching is a key benefit of using automated FX platforms. Not only

our platform providers will also call us if something particularly interesting is

is this electronic method far more

going through the markets. They all try to

efficient than checking confirmations by

give us the best advice, which allows us

fax or phone, it is also bringing the

to make best practice.”

industry up to the standards required by

Bob Hemstreet

“Our entire process including both FIRSTTM and FXall is much more reliable, time efficient, and cost effective.”

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regulators. Bob Hemstreet continues:

Bertelsmann uses 360T’s TEX and iTEX

“From a confirmation perspective, this has

platforms

resulted in significant time and cost

trading.

savings for Textron. Prior to having this

settlement, but currently no pre-trade

technology, we would confirm each

preparation or confirmation and netting

individual trade three times; Textron

facilities; these are being implemented

would prepare a memo to be sent to the

using Misys, which is involved in a

bank with the trade details, then we would

strategic alliance with 360T, through the

receive a phone call from the bank asking

first half of 2006. Yet eFX trading, even

to confirm details, and we would receive a

without

paper confirmation from the bank asking

confirmation and netting facilities, has

us to review the details and confirm by

improved Bertelsmann’s best practice in

signing and sending back to the bank.

many ways.

for The

external company

pre-trade

and has

internal gross

preparation

or


Treasury Best Practice – the role of FX automation

Electronic pricing allows the company to

auditors,

accept quotes at higher volume and

companies when we have done FX deals

and

to

our

subsidiary

simultaneously, which means more

on their behalf, and that we’ve used best

transparency and better prices. STP has

practices. eFX allows us to show the

also been improved, enabling the

whole range of qualitative decisions that

company to reduce the manual labour

you apply to a trade.”

traditionally involved in entering deals and correcting mistakes.

Kors

continues:

“Having

an

FX

automated system has also helped with Scheller outlines the best practice

regard to internal audits. It’s very

advantages for his treasury department

auditable, showing all transactions and

using eFX technology: “The advantage

histories. We’re aiming to achieve

of e-trading means we receive more

further efficiency through STP by linking

quotes

from

more

banks,

versus

transactions over the phone. Also, all the deals go straight into the dealing system, allowing us to achieve a high degree of security, as well as having the settlement instruction at the maturity of the deal.” Additionally, the trading

Currenex to our treasury management system, Baxtre, and then into our SAP platform. We hope to have that done in a year’s time.” Future improvements

system reports are making internal

Improvements to eFX technologies are

auditors extremely happy.

required, Grinnell believes. He wants packages to be unified with better automation, such as matching of FX

Auditing

On auditing, Bob Hemstreet adds: “Years ago there was a concern that we would find items in our yearly external audit

trades and reconciliation, which he says do exist but not necessarily all on the same platform. The improvement that Kors

that were not in our database, or perhaps

would like to see on Currenex is in the

were entered improperly. Today we do

confirmation process. Counterparty banks

not have that concern at all. We are

still

expecting and do receive a 100% match.”

confirmation to the Royal Swets and

insist

on

sending

separate

Zeitlinger treasury department, asking that Markus Fankhauser

“Using eFX technology makes our work very comfortable, particularly for matching and settlement.”

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eFX technology is extremely important

they be signed and returned. “To reach

in helping Aegis achieve its best practice

more efficiency, if we could all agree that

guidelines

in

The

the Currenex confirmation is adequate, it

company

uses

platform.

would save faxing a lot of paper

Grinnell says: “We have to be able to

backwards and forwards. A lot of banks

show both internally to our board, our

are reluctant to accept that though.”

auditing the

terms.

360T


Automation in Treasury – Facilitating Compliance with Sarbanes Oxley In recent years, treasurers of international companies have had to learn to deal with significantly increased volumes of regulation. The combined effect of Sarbanes-Oxley for SEC registrants and IFRS for companies in Europe has forced many companies to focus much of their scarce spare resources on compliance issues. This has certainly been the case for many finance functions, and the treasury department has proved no exception. Sebastian di Paola, Partner, PricewaterhouseCoopers Is it all worth it?

I

n parallel with their Sarbox efforts, treasury departments have

The cost of compliance with Sarbox has proved pretty

had to devote resources to integrating IAS 39’s complexities

staggering.

According to a recent survey by Financial

into their risk management operations and will now have to

Executives International, large public companies spent an

deal also with the additional disclosure requirements contained

average of USD 4.4 million last year on compliance with Section

in the IASB’s latest standard on financial instruments, IFRS 7. In

404 of the act. Commentators have been questioning for some

the meantime, more strategic initiatives, for example in the area

time whether real shareholder value is being derived from these

of treasury technology, are being left on the back burner while

initiatives, and whether the capital markets will end up better

efforts are focused on meeting the tight deadlines imposed by

off. Some non-US companies are now viewing the burden of

the new regulations. These efforts will not end there. Over time

complying with the SEC’s stringent compliance and reporting

companies will endeavour to further fine-tune their processes,

requirements, as outweighing the benefit of their US listing and

in order to reduce the cost of compliance. For many this may

there has been increasing talk of delisting from the US.

include replacing multiple spreadsheets or poorly integrated

few companies have even chosen to do so and the SEC is

patchworks of systems with more automated and straight-

now looking into ways to ease the compliance burden to stem

through processing (STP) solutions.

the tide.

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A


>>>

Treasury Best Practice – the role of FX automation

The question of whether the benefits of Sarbox compliance outweigh its costs is of course key, but in considering this question one should not lose sight of why these regulations have come into being in the first place. The genuine need to restore the confidence of investors and stakeholders in corporate reporting stemmed from major failures in both the US and Europe. Treasury has had its own share of disasters, many of which predate the Enrons and Parmalats by nearly a decade,

including

control

failures

at

Orange

County,

Metallgesellschaft, Barings and more recently AIB and NAB. Already back in 1993, a G30 study on ‘Derivatives practices and principles’ highlighted the need for a comprehensive and harmonised approach to accounting for financial instruments. It is this context which has spawned the regulations we face today, and it is difficult to argue that some sort of regulatory action was not needed. Figure 1 shows the impact of treasury activities on the financial As to whether these regulations meet their stated objectives or

statements and some of the related internal control activities.

whether they drive change more in form than in substance, the

Many of these will be key controls for Sarbox purposes and

jury is still out. However, it seems that recently the number of

accordingly will need to be documented and tested under

companies recognising that there is a silver lining to the Sarbox

section 404. All this attention is bound to put treasury in the

cloud is increasing. Some CFO’s are beginning to see that there

spotlight, a fact not lost on those more savvy treasurers who

is a route to regulatory compliance that encompasses significant

have used this focus as an opportunity for greater “air time”

value for finance, and thence for the company as a whole.

with the CFO and Board and to engage and educate senior management via discussions not just about internal control and

What do companies have to do to comply with Sarbox

Most of the focus of companies’ implementation efforts is on

accounting, but about how treasury really adds value to the business, a topic often poorly understood by non-specialists.

section 404 of the Sarbanes Oxley Act. This section requires an annual report by management regarding internal controls and procedures for financial reporting, and an attestation as to the accuracy of that report by the company’s auditors. In order for management to be able to provide this report, companies must undertake an extensive documentation exercise. This involves analysing processes with a view to identifying all controls which are key to ensuring the accuracy of information included in the financial statements and testing these controls on a regular basis to ensure they are operating effectively. This is easier said than done, as few companies have good process documentation, and even those that do, generally have not specifically analysed and documented their key controls, let alone determined how they will ensure these are working effectively.

Indeed

Sarbox

requires

mean for the FX hedging / dealing process? Firstly it means the FX process needs to be analysed, key controls identified and documented.

This is a costly exercise, but is all the more

difficult to undertake when the underlying activities rely on a mixture of manual and automated procedures, operating on a variety of poorly integrated systems and spreadsheets. In addition, if the front office, back office and accounting processes are fragmented or manual, then each critical step will require a key control and most of these controls are likely to be manual. Each re-input will require a control to ensure all data has been completely and accurately transferred from one part of the process to the next, for instance when information is

No longer is it sufficient to produce a set of reliable financial statements.

At a more detailed practical level, what does this concretely

that

companies

demonstrate that they have the controls in place to ensure that any errors are picked up and that assets are safeguarded against loss or material fraud. What does this mean for Treasury / FX processes

transferred from a front office system (which is still often a spreadsheet) to the back office system for further processing, confirmation and settlement, then on to the accounting department for the calculation and posting of accounting entries. Each of these controls will be key, meaning that the control must be documented and tested.

In the case of manual

controls, which the input controls are also likely to be, testing

Owing to the volume of risks and flows managed by the

them will also be a manual, and again time consuming, exercise

treasury function, treasury bears a significant share of the

based on statistically significant samples, with testing

Sarbox burden.

procedures carefully documented to demonstrate compliance.

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91


Treasury Best Practice – the role of FX automation front when implemented, and subsequent testing focuses on making sure there has been no change to the set-up and that it is secure. This will generally be a far less costly exercise. Turning it around – how can SOX help with automation

And it’s not just about input controls: other

typical

control

activities which may be manual in nature include checks on aggregation of FX forecasts from business units, deal authorisation and limit monitoring, confirmation matching, documentation of hedges for hedge accounting purposes, verification of spreadsheetbased valuations of FX derivatives, and many more. In other words, the cost of compliance for a poorly integrated FX

process

is

significant

since

it

involves

complex

documentation, manual controls and manual testing of those controls. Processes which were inefficient and costly in the past become all the more so post-Sarbox. How automation can help with SOX compliance

It becomes obvious from the above, that automation is one of the answers to easing the SOX burden. Establishing, documenting, operating and testing manual controls is a much more costly exercise in the long run than doing the same in an automated environment.

Automated

controls

and

procedures

are

documented and validated when they are implemented. Thereafter appropriate controls over system change and procedures to ensure the control is still operating as designed are sufficient to ensure compliance. So automation is the best solution not only operationally, but also from a control perspective. Indeed processes which are integrated and straight-through in nature contain fewer key controls than the more manual equivalent. This is because once a system has been correctly set up, it can be relied upon to perform repetitive tasks accurately. The key controls when full STP is in place are therefore fewer in number.

Many treasurers have been looking for years to secure budgets for investment in technology to enable them to automate their treasury and FX processes and integrate them with forecasting and accounting, as well as with external banking solutions and with other partners. Treasurers will want to use the added focus on control as a basis for justifying the budget to do with technology what they have been wanting to do all along. And what about IAS 39?

For companies with listings in both the US and Europe, IFRS and Sarbox have created something of a “double whammy”. IAS 39 on accounting for financial instruments has had a significant impact on FX hedging processes, and here again, automation can help. For many companies which hedge FX risk on a centralised basis, IAS 39’s prohibition on hedge accounting for treasury centre netting has meant that a larger number of deals are undertaken externally, usually on a gross basis. This approach has been possible for some only because electronic dealing solutions enable them to route the larger volume of FX deals through to their banking partners without increasing the operational risk inherent in manual dealing and record keeping. In addition to reverting to generally more vanilla FX hedges, companies have tended to use less dynamic strategies than was previously the case owing in part to the burden of maintaining and updating hedge documentation. Strategies which involved recalibrating hedges in response to changing markets have suffered under IAS 39 owing to the complexity of changing hedge relationships, performing effectiveness tests and generating the resulting accounting entries. Treasurers have had to forego some flexibility and to go in and out of the market less frequently than they might otherwise. Automation should give greater flexibility here since systems deal better than people with these complex repetitive tasks. One consequence of IAS 39 is to take some flexibility away from treasurers. Putting in place well designed and well-configured systems could be a way of getting some of this flexibility back. Though companies must ensure they really understand the processes within the system to avoid this becoming a black box.

The focus is then placed on making the up-front

investment in system implementation and testing, ensuring the

Conclusion

system is correctly maintained and secure from unauthorised

Sarbanes Oxley compliance has proved a costly exercise and the corresponding value remains elusive. The cost of compliance will continue to be high for fragmented and partially manual processes. Companies wishing to improve their FX dealing processes by increasing the level of automation will find the Return on Investment for such projects easier to demonstrate now that SOX has made manual processes more expensive to run. Treasurers and their CFO’s should view the new regulation as a catalyst for driving through beneficial change to their treasury and FX processes, seizing the opportunity to reduce ongoing costs through increased automation.

access or change, and on controlling the critical first input. Take the example of confirmation matching. This is always a key control in the FX process since it provides the basis for verification

of

all

deal

details

against

the

external

counterparty’s data. If this control is manual, say by fax or email, then the process of ensuring the control works, is also manual and generally time consuming. If on the other hand the confirmation matching control is automated, as is generally the case with electronic dealing, then the control is tested up-

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Why Automation for IAS 39 is a must-have – not a nice to have Idealist in treasury love to talk about achieving STP (“straight-through-processing”), or having a one-stop single solution treasury management solutions (“TMS”) that does everything. While some treasuries have gotten pretty close to reaching this panacea for cash management or for Fx execution, the advent of hedge accounting rules across the globe have thrown monkey wrenches into the many plans for improved automation in treasury. In fact, the new requirements are forcing more manual processes for treasury which is not a good position in the post-Sarbanes Oxley world for having the proper financial controls. By Jiro Okochi, CEO & Co-Founder, Reval.com, Inc or US GAAP followers, the regulations for derivative

F

companies must follow proper documentation and hedge

accounting under FAS 133 is several years old, but ACG-13

effectiveness analysis to achieve beneficial hedge accounting

(Canadian GAAP), CTEN (Mexico) and IAS 39 (basically the rest

treatment. Under IAS 39, the requirements are more stringent

of the world) are very new and have put significant amount of

as it does not contain beneficial treatment of certain interest

pressure and paperwork on treasurers and accountants. There

rate hedges (Short-cut Treatment) and basic foreign exchange

are the unfortunate multi-nationals who have to report under

and commodity hedging (Critical Terms Match) that exist under

more than one standard as well.

FAS 133 and ACG-13.

While there are differences between the standards, they all

These hedge accounting rules impact all aspects of the

require companies to record the change in values of the

transaction workflow, from pre-trade analysis to post-trade

derivatives from period to period. To avoid P&L volatility due to

debit and credits. It also requires companies to be able to

these mark to market movements of its derivative hedges,

conduct a variety of quantitative and statistical analysis on both

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>>>

Treasury Best Practice – the role of FX automation

the derivative and the exposure every period, usually monthly

At Execution:

with some even conducting daily testing. All of these activities

1. At Inception Documentation: the rules require that the

and processes are perfect ingredients for the need to have a

company designate at the time of hedge execution that it will be

truly automated process, but it goes beyond achieving

applying for hedge accounting. Again, in order to prevent trading

operational efficiencies and becomes of strategic importance.

activities from being disguised as hedging, the “time stamp” designating the hedge to an exposure and identifying the risk is

The following are key areas within hedge accounting that would

key, otherwise a company could in theory wait until month or

benefit from automation:

quarter end to pair up hedges to exposures after the fact.

Pre-Trade Workflow:

The best way to record the time of execution would ideally be

1. Documenting Strategies: before entering into a derivative

through a system, where either upon execution via an

transaction, the risk or exposure that is being hedged has to be

interface to trading platform or exchange, or upon entry into the system, the time is recorded and a workflow

properly identified and linked to the corresponding

manager is initiated that would link the

derivative. References to sections of the risk management

policy

and

derivative to the proper exposure.

template

documentation to generic hedging 2. Prospective Assessment: also at

strategies are repeat actions and

the inception of the trade, the

should be automated.

company must provide evidence 2. Consistency in approach: is

that the hedge relationship has a

also required, i.e. a company

high probability of remaining

should

effective going forward.

use

the

same

prospective and retrospective Although an unusual accounting

assessments every time it enters

requirement

into a LIBOR cap to hedge similar

forward

analysis does enforce good risk

manual process leaves the company

management practices.

open to risk that one person may use a

It is perhaps

this area of hedge accounting that has

different technique to show effectiveness.

troubled most companies due to the lack of

This would be even more likely in a

clarity of methods to be used and due to the

decentralized treasury or subsidiaries reporting for FAS 133/IAS 39 separately.

where

looking proof is rarely needed, the

floating rate interest exposure. A

complexities of calculating the results, especially on a manual basis.

3. Exposure Management: even without hedge accounting rules, obtaining accurate and timely exposure information can

Some of the alternative assessment methods include statistical

be very challenging. The entire concept of hedging lies on the

analysis that shows high correlation between the derivative

premise that there is exposure defined, otherwise the company

and the hedge. Historical data or simulating data and running

is simply trading and hedge accounting would not apply. The

regression, slope, f-stat and t-stat analysis to show that the

challenge has been for the regulatory bodies to set up rules

correlation is high (R SQ> .8), that the relationship is inversely

that would ensure the exposure is real and that the derivative

proportional (between -0.8 and -1.25) and there are enough

hedge is an appropriate hedge. Therefore, exposures have to

data points in the sample set (typically >30) is the more

be highly probable of occurring and under FAS 133 that means

common approach.

within 60 days of the date the exposure is anticipated. Under IAS 39, its less clear, but in general the company most have

An alternate to this method is to conduct a stress test on the

evidence that it the exposure is highly probably, and for cash

hedging pair to see if the relationship remains effective in

flow hedges, that typically means showing a historical pattern

“worst case” scenarios. While either of these methods could

as proof. Manually capturing exposure data, limits the ability

be done on a manual basis, the calculation needs to be done

to aggregate exposure and also to prove the high probability of

consistently and regularly at the start of each period and would

the exposure from occurring for cash flow hedges.

best be done on an automated basis to avoid error.

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Treasury Best Practice â&#x20AC;&#x201C; the role of FX automation

Post-Trade:

3. Integration To The General Ledger: after jumping through all

1. Retrospective Assessment: the rules also say that not only

of the documentation and hedge analysis, the debits and

should the hedge relationship show effectiveness going

credits have to be calculated and posted properly. Constant

forward, but also to show that the relationship was indeed

adjusting has to be done as the derivative can change from

effective over the actual accounting period. This Retrospective

positive to negative (i.e. asset to a liability) and for cash flow

Assessment need not be the same method used for

hedges, the equity component (OCI under FAS 133, hedging

Prospective and can be as simple as showing the performance

reserve under IAS 39) has to be released as the anticipated

of the hedge as percent of the change in derivative over the

exposure becomes recognized to the balance sheet. All of the

change risk of the exposure, otherwise known as the Dollar

complexities and nuances would call for an automated process

Offset method.

to integrate to a general ledger.

Under the Dollar Offset method, the ratio must fall between

Conclusion

80% and 125%, and any result outside of that band would

By looking at the high-level transaction workflow under IAS 39

result in disqualification with the entire change in value of the

or FAS 133, it is evident that the requirements are time

derivative going straight to earnings. If Dollar Offset method is

sensitive, time consuming and complicated to conduct on a

not used, then statistical approaches can also be used. Again,

manual basis. Most treasury management systems have failed

the

performed

to deliver the proper hedge accounting module due to the need

consistently and every period, which would best be done

to have accurate derivative pricing modules, historical market

automatically.

data, complex assessment calculators and a GL module that

retrospective

calculation

needs

to

be

can handle the new standards.

So for most treasurers the

2. Measurement: to add to the confusion, the actual

choice is either a manual process of spreadsheets done outside

measurement of ineffectiveness is a standard calculation

the TMS or to find a best of breed solution with interfaces to

regardless of which assessment methodology a company

capture the executed derivatives and exposure information

uses. For options, the calculations are more complicated and

simultaneously and to run all of the periodic, consistent

several different methodologies exist. As the measurement is

calculations with processes every month or quarter end. If ever

ultimately the amounts that go to the balance sheet and affect

there was a need to have straight-through processing, the hefty

earnings, this should be done automatically to avoid human

requirements under the many derivative accounting standards

error and to provide the proper controls under Sarbanes Oxley.

would certainly be a prime candidate. For more information please email info@reval.com

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e-Forex Case Study

Case Study

Ravi Chopra

98

january 2006

For most corporates, speculative gain on FX activity is not a key part of the corporate business model, so the pressure is always on corporate treasury to reduce the costs of processing FX transactions. At the same time, anything that frees up treasury staff from manually processing FX to focus on more strategic risk management activities is also welcome. Ravi Chopra, senior treasury manager at Juniper Networks, explains to e-Forex how Juniper accomplished both these objectives by turning its FX hedging activity into a straight through process. FX hedging

F

or most corporations of any size, improving STP in payments and receivables has long been a major objective. By contrast, introducing STP into FX transactions has historically been a rather lower priority. However, for corporations with even a relatively low level of FX exposure there are a number of areas of FX activity that can benefit from STP, including international payments, subsidiary funding and of course FX hedging. At Juniper we have implemented STP for all three of these processes. (An illustration of FX STP in the international payments process is in the July 2005 issue of e-Forex - "Integration of FX STP and automation into other processes".)

Although Juniper had collaborated with Bank of America in achieving FX STP for international bulk payments, we also wanted to focus our efforts on improving our FX hedging process. There were a number of reasons for this. One of the most important was that FX hedging is already relatively complex so if numerous manual operations are also required then the whole process becomes extremely unwieldy. This unwieldiness results in a number of quantifiable additional costs. The more predictable of these costs include the time taken to input data manually, which results in more value added treasury activities being neglected. (Just making it through the month end close becomes

The three FX activities in question inevitably involve extensive interaction with banking systems, so consultations with banking partners - especially Bank of America - have been a key ingredient in determining the most efficient way of achieving this interaction.

e-FOREX

the singular goal of all treasury personnel). Less predictable, but much more alarming, are the potential losses that can be sustained in the case of human error, such as accidentally mis-keying a trade for the wrong amount and/or currency.


>>>

Treasury Best Practice – the role of FX automation

For each manual step in the current FX hedging process we asked ourselves a number of questions: what value did the manual intervention provide, what calculations were required, and were we just checking FX pricing? Depending upon the answer we would then decide whether or not it was possible to eliminate that manual step. For example, while we could not eliminate initial data entry, we could certainly dispense with the manually re-entry of static data, such as settlement instructions. By the same token, decisions such as whether or not to hedge required a human element, while repetitive calculations such as netting did not.

Another important STP incentive for Juniper or any other growing company is the need to institute processes that are scalable, but that do not require a commensurate scaling up of headcount. The ideal situation is to be able to accommodate expanding transaction throughput without expanding payroll. Furthermore, given a certain amount of planning, achieving this scalability through FX STP is not extortionately expensive. The starting point

Juniper’s existing FX hedging process involved a large number of manual steps. FX exposures were manually aggregated from spreadsheets e-mailed into treasury, before being manually rekeyed into the cash forecasting and balance sheet modules in the treasury workstation. Grouping and netting of these exposures were also done manually, as were the actual resulting trades – which were transacted over the phone, with the resulting trade details also being manually keyed in. Trade confirmations (phone and e-mail) and settlements were also manual, as were the recording and posting of the resulting accounting entries. Obviously, a process as manually intensive as this had a number of major drawbacks. Firstly, it was extremely slow, with month end hedging typically taking three days to complete. It was equally error prone – perhaps unsurprising when you consider that data entry involved no fewer than six keying in activities. The energy expended on this inefficient process (and related corrections and reconciliations) could instead have been applied to the far more important task of determining a strategy for dealing with long-term FX economic risks.

We also considered the investment in technology that would be required to automate the FX hedging process. It became immediately apparent that this was smaller than might be expected – for example, relatively simple programs using Web technology could be used to collect, collate and net subsidiary data. The new FX hedging process

Based upon our analysis of the existing largely manual FX hedging process, we designed and executed an STP replacement. This starts by obtaining information on the various FX exposures online, via Web based templates that feed directly into our treasury (FX) workstation, Green River Computing’s Orbit. Orbit then aggregates the exposure information and sets up the appropriate trade(s). These are pushed via a secure ADI data transfer to an online FX multibank web portal, where they are executed with approved counterparty banks. Juniper currently uses FXall for this purpose, but any one of a number of multi or single bank portals, such as Bank of America’s FXtransact, would also be suitable for this purpose. These completed trades are downloaded back into Orbit via the same secure ADI route, with any transfer errors being automatically flagged by Orbit. Once these trades have been downloaded to Orbit, they are locked and saved and therefore cannot be changed by the trader. FXall’s “Settlement Center” module is used to record all trades, whether they are done online with FXall or over the phone, and thus effectively acts as a third-party trade confirmation agent. Orbit automatically recognizes those trades executed on FXall

Apart from absorbing too much of the time of a leanly staffed treasury team, knowledge of this type of manual process is not easily transferred to other personnel. This inevitably created problems around holidays, sickness, or personnel moving to other jobs. Finally, the existing process was simply nonscalable and would have been unable to accommodate the company’s global growth and expansion. What to change?

As a first step in our move towards STP of FX hedging we undertook a detailed review of the existing manual process flow, with the overriding rule/objective for the new process that we would key in data only once.

january 2006

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99


This reduction in manual activity, coupled with system features such as the locking of completed trades, also represents a significant controls

improvement

as

regards

in

internal

Sarbanes-Oxley

compliance. The integration of systems possible in an automated

environment

streamlined

both

has

also

settlement

and

accounting. Orbit has been configured so that, where necessary, settlement dates automatically trigger the release of the appropriate wire transfers to Bank of America for execution. At the same time,

Orbit

automatically

writes

e-Forex Case Study Case Study

accounting entries to a flat file that is

100

january 2006

in

turn

automatically

uploaded

to

and greys them out to indicate that manual

Juniper’s Oracle ERP system, which spares

confirmation is not required. The ability to use FXall

accounting personnel from having to re-key this

as a trade confirmation agent (even for any manual

information.

trades) means that it is no longer necessary to check trades in two separate systems in order to submit

Overall costs have obviously been reduced both

confirms. Particularly where trade volumes are

within

substantial, this not only saves time, but also

personnel have also been freed up to devote time

significantly reduces the risk of errors.

to strategic value added tasks, rather than

and

outside

treasury,

and

treasury

mundane operations. This in turn has obviously To ensure appropriate segregation of responsibility,

benefited staff motivation and retention. Finally,

a member of treasury who is not authorised to

the new FX hedging process is scalable and

trade confirms any manual trades. In Orbit this is done in a trade confirmation screen, and in FXall via

therefore ready to accommodate future growth in FX volumes and the range of currencies traded.

the Settlement Center. Value

The member of treasury authorised to confirm also issues settlement instructions to the counterparty

Apart from the benefits outlined above, one of the

bank via phone or FXall as appropriate. All

most gratifying points about the FX hedging STP

settlement instructions are standard repetitive

project was how little it cost – less than $20,000.

approved Juniper delivery instructions, which

Furthermore,

cannot be changed without the written approval of

maintenance and FXall access are minimal. As a

senior management.

result, the annual time saving for traders, treasury

the

annual

costs

of

system

analysts and accounting personnel has resulted in The benefits

The new FX hedging process has netted a number of significant gains, both for Juniper’s treasury and the corporation as a whole. Prominent among these gains has been the drastic reduction in the

a payback period of no more than six to eight months. These savings could also be reproduced for most treasuries with more than minimal FX activity, making this sort of an STP project an eminently worthwhile undertaking.

time taken to complete the monthly FX hedging process – down from sixteen hours to one hour.

As a modest first step, if a treasury group does not

The time required to complete confirmations,

have any budget for a treasury workstation, it

netting and settlement has contracted even more

could still implement some straight-through

dramatically – from four hours to ten minutes.

processing in FX hedging by using spreadsheets to upload trades into an online FX portal. Apart from

Data is now keyed once, rather than six times,

more efficient order execution, this will also offer

so the probability of keying errors has also

other benefits such as the ability to auto-confirm

been reduced.

these trades using the confirmation and settlement center feature provided by portals like FXall.

e-FOREX


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THE

e-FOREX

FORUM

eFX Technology powering the growth of new trading opportunities With Mark Davies, CEO of Misys, Global Managed Services, Farid Naib, CEO of FNX Solutions, Brian Maccaba, CEO of Cognotec, Mike Thrower, Director of Marketing at Wall Street Systems and Rustam Lam, Managing Director of Townsend Analytics, Europe.

Is the current pace of innovation and uptake in Electronic FX being driven by the sell-side or buy-side and if the traditional role of FX technology vendors has been to connect each side together, does the answer really matter to them anyway? Davies: The current pace of innovation in Electronic FX trading is driven by the sell side, specifically trading portals. While the buy-side clearly benefits from technology advances and expanded instrument offerings, it is the sell-side that gains the most by offering state-of-the-art trading platforms. In addition to securing a competitive advantage, innovative sellside technology providers also achieve new sources of revenue. The newer technologies have been able to support immediate trade execution, competitive multi-bank bidding, broader instruments, wider tenors, anonymous trading and credit enhancement through prime brokers. FX technology vendors have been prominent in supplying solutions and more importantly bringing both sides of the trade together. Naib: In today’s market, FNX innovation on both the sell-side and buy-side is being driven by the buy side’s needs. The buyside is increasingly demanding a more streamlined eTrading capability with better price transparency, more product coverage, and more services leading to innovation on both sides to meet this need. Development is being served equally on both sides, so, in the end, it does not matter which side is driving the innovation.

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Mark Davis

“Two areas where technology would improve integration of the full deal lifecycle and abate STP bottlenecks are FX confirmations and Standing Settlement Instructions”

Maccaba: The uptake in electronic FX has been driven by the availability of new technical solutions, without doubt. In the absence of the technical infrastructure, the increase in bank-to-bank and margin and retail aggregation trading (which have the two most dynamic areas of growth) wouldn’t exist. However, to an extent it’s an academic point – the reality is that both the market and the vendors benefit. The next growth area - the emerging trend in ‘black box’ algorithmic trading - is also technology-dependent. Thrower: Without doubt, in the past 18 months the buy side have embraced eFX in a big way. As this is such an important market segment for many financial institutions, and hence very competitive, the sell side firms are battling to offer the


>>> killer eFX solution to both attract new and retain existing client flow. For vendors like Wall Street Systems, who have a major stake in both sides of the FX market, delivering innovative eFX solutions that span the whole transaction lifecycle, from price discovery through trading to confirmation is key. Furthermore, leveraging the best in web-enabled technology and service oriented architecture enables our clients to muster the key building blocks to a successful eFX architecture. Lam: Innovation is being driven by both sides, each with differing agendas. Also complicating matters, there are a number of alternative liquidity models that have sprung up, each catering to different specialty needs, further fragmenting the FX space. The sell-side has a need to explore and provide appropriate methods of interaction with their liquidity pools, from simple ‘request for quote’ through to streaming and tradable multi-bank prices. The buy-side – and especially the hedge fund and high frequency traders - are driving the requirement for access to deeper third-party portal liquidity. Increasingly, access to liquidity - be that request for quote, streaming prices or ‘ECN’ type liquidity - really depends on the profile of the end trader – including credit, trading style, frequency, and size. One of the major challenges (and advantages) for the vendors is to provide all of these in a controllable and usable fashion for both the sell-side and buy-side participants. Choice of FX provider can be influenced by more than just the provision of the latest pricing and execution technology. Many clients are also looking for automation of the full deal lifecycle. Are there still some areas of the trade cycle where automation falls short and technology could improve integration and STP bottlenecks? Davies: Two areas where technology would improve integration of the full deal lifecycle and abate STP bottlenecks are FX confirmations and Standing Settlement Instructions. In both cases, faxes and phones are still used by a significant number of institutions. A number of institutions have implemented an electronic treasury system such as Misys

Treasury Plus to reduce the STP bottleneck. Automated treasury services can also provide a standardized confirmation matching process and the ability to store and retrieve any number of SSIs in a variety of industry standardized formats. Electronic treasury systems truly create an STP process that minimizes trading errors and settlement fails. Naib: Yes, there are still some areas of concern within the life of a trade, with the majority of STP bottlenecks being encountered on the back end or clearing side. Some concerns relate to how clearing firms interface with their clients’ systems. Another typical concern is the need to maintain many different accounts for clearing. Many buy-side firms trade a variety of products and currently their crossproduct needs are not being fully met. Maccaba: Much of the focus of STP has been in the post-trade environment. However, the focus has now switched to pre-deal processes and the emerging capability to integrate pre-deal decisionmaking into electronic trading. This requires a degree of flexibility in the banks’ technical infrastructure so that APIs [application programme interfaces] can be connected to support pre-trade automation. Some order management systems for instance do not allow API connectivity, however Cognotec’s has been developed with precisely this flexibility in mind.

Farid Naib

“Many buy-side firms trade a variety of products and currently their crossproduct needs are not being fully met” Lam: The FX market was an early adopter of electronic trading; as a result a number of disparate proprietary protocols and processes were built throughout the trade cycle. However, the industry is now gravitating towards ‘industry standard’ protocols like FIX. Continuous Linked Settlement

and

requirements

risk

have

management

gained

greater

prominence as well. As a result, there is need for consolidation and standardisation within each part of the trade and STP process to work more efficiently. The arrival of new corporate governance standards such as Sarbanes Oxley and IAS 139 has highlighted many of the benefits of automation in helping treasurers meet compliance. Do you expect to see increased demand for integrated tools

Thrower: We have seen renewed interest from our clients and the market to move the focus from trade execution further along the transaction lifecycle. Both buy and sell side firms are looking to automate the whole transaction lifecycle to reduce operational cost but also to meet regulatory pressures, address compliance issues and to provide greater transparency. Sell side firms are extending their eFX offerings to enhance and expand their client value proposition. Our analysis suggests that there are many sell side firms that are not there yet. The focus here is on confirmations, matching, settlement, netting, revaluation, risk; a broad set of functionality. Few technology vendors are positioned to be a one-stop shop for all this – making integrated client-centric solutions with a common look and feel problematic.

that add compliance to the Straightthrough Processing path and how much of a challenge is it to develop these? Davies: There is no doubt that integrated compliance tools will become standard requirements treasurers

as

demand

more STP

and

more

from

their

vendors and financial institutions. The systems along the entire value chain need to be operationally compliant with SOX and any financial risk associated with the value chain needs to be mitigated for IAS39 compliance. Treasurers are now in a situation where they are responsible for ensuring compliance in both areas, so they are learning to ask the right questions of their suppliers to help them determine the best solution in terms of functionality and compliance.

january 2006

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103


THE

e-FOREX

Naib: This depends on the level of oversight and regulation that comes into play

for

funds

in

the

future.

The

imposition of regulatory requirements and reporting will undoubtly create a need for additional technology as part of the STP process. On the corporate side,

FORUM In order to improve client retention, many FX providers are starting to extend their e-channel service offering, horizontally with more value-added services and vertically with more instrument coverage. How can technology providers assist them with this?

regulatory requirements and reporting are increasingly seen as a standard part of STP

and

technology

vendors

have

learned to address this. Maccaba:

The

impact

of

the

new

standards has varied according to the market segment. In the corporate area it has had a significant impact which has spurred

participants

into

upgrading

systems and procedures, and drawn their focus away from foreign exchange

Maccaba: The evidence we have is that single-bank trading platforms are experiencing a new lease of life, as banks have shown they are able to fully satisfy clients’ demands for the competitive prices (initially found only on multi-bank portals) on a single platform. Where there is increasing demand it is for higher quality value-added services such as pretrade information (including analytics and risk management) and faster execution. Overall, we’ve found that FX providers are upgrading and customising their core facilities in order to differentiate their offering from competitors and to retain existing clients. Broader instrument coverage, where it has been added, we believe is tending to attract new customers such as institutional investors.

trading. However, in the longer term with the right tools and controls in place automated trading will lead to greater transparency, higher levels of STP and help ensure better compliance. Thrower: Compliance has always been part of our straight-through processing model. It is through such integration that firms

can

achieve

true

operational

efficiency and reduce their total cost of ownership. By spanning the whole transaction lifecycle, encompassing both the internal and external workflow, Wall Street Systems have been able to work in partnership with many of our clients to achieve +99% STP. More fundamentally, as FX providers move into other asset classes, they will find that the regulatory compliance challenges can often be different and in many cases more onerous. To have this in mind when embarking on designing the appropriate web architecture is critical.

Brian Maccaba

“The next growth area - the emerging trend in ‘black box’ algorithmic trading is also technology-dependent” Davies: Technology providers are motivated to provide flexibility in adding new services and instruments in order to grow in this marketplace. Single instrument coverage is no longer useful to most providers because new instruments are coming out all the time. Treasurers have already started to demand the ability to manage exposures of all kinds, execute deals, confirm them, and create cash and accounting flows. Likewise, specializing in a single service offering is very limiting these days. Customers are looking for value added services to enable straight through processing, limit risk, and lower the number of systems they have to integrate with. The greater the depth and breadth of services a vendor offers the more value treasurers will place on their services.

Thrower: As well as moving further back in the transaction lifecycle, going cross asset class is key to the agenda for many FX providers. For some technology players, this is a step into a new world, having been focussed solely on FX historically. For Wall Street Systems and for our clients, cross asset class is business as usual. We have been supporting tier one firms with their interest rate and fixed income e-solutions for some time. The challenge for many FX providers however, is to get the various business silos working collaboratively. Often these businesses, and their internal IT functions, have been managed and run as separate business units. The challenge for these firms is to move from a productcentric mindset to a client-centric mindset. This is harder than it might appear.

Lam: Because FX has traditionally been an unregulated market, the trading components and risk and compliance management are often very different in nature. We’ve seen an increasing need and opportunity for real-time risk (‘value at risk’) analysis and the simultaneous ability to monitor and adjust buy-power or margin based on this in a seamless fashion. In response, the latest version of RealTick features an integrated, real-time risk management tool called the TAL Risk Analyzer

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Naib: Most sell-side firms develop asset class fiefdoms internally. Technology providers can help them develop a unifying cross asset class front end through the ability to interface with different legacy systems within the organization and thus provide the buyside with a more unified system. Technology providers can also assist sellside firms in the development of more robust offerings that provide more downstream capability.

Mike Thrower

“As well as moving further back in the transaction lifecycle, going cross asset class is key to the agenda for many FX providers.”


>>> Lam: At many banks and brokers, the ability

functionality as well as pricing, offers the

to offer more instruments is constrained

most in gaining a competitive edge and

due to a ‘siloed’ history in terms of both the

market share.

technology and the business model. However, clients and end users are increasingly seeking the ability to trade multiple markets simultaneously--often from a single portal. What’s more, they want advanced technology that will allow them to utilise trading techniques and strategies common in one market and to apply these into another market – either as a new single asset trade (FX) or a real-time conditionally linked trade across two

Lam: The adoption and development of algorithmic trading in the FX markets will be an important driver for both the sellside and buy-side communities. One of the challenges lies in the differing liquidity dynamics and microstructure for an OTC market and exchange versus an ECN-type market. Firms with pricing engines that can provide smarter pricing and/or algorithmic execution – either for internal desks or externally for clients - will be able to price, manage and derive greater order flow across a broader profile of users with differing risk profiles.

markets (such as an ADR trade requiring a stock trade AND resultant FX trade). For the Rustam Lam

firms that can facilitate multi-product execution, the ability to offer a multi-asset class trading platform like RealTick provides a competitive advantage, because clients

“The adoption and development of algorithmic trading in the FX markets will be an important driver for both the sellside and buy-side communities”

can seamlessly analyse and execute trades from a single platform. And it provides a cost-effective solution for liquidity providers who want to offer advanced order types and trading

capabilities,

tremendous

but

resources

lack

the

required

for

development in house.

of advanced eFX technology, for example the provision of faster and more robust engines,

revolution in terms of the provision of onetouch executable streaming rates. This has widened the gap between the “haves” and the “have-nots” – the “have-nots” are falling increasingly behind. The new

In what ways do you think the application

pricing

Maccaba: There has certainly been a

will

create

new

opportunities for competitive advantage

competitive margin is not between the

Davies: As in all business environments the

time efficiencies online trading offers over telephone

orders.

It’s

between

one

counterpart offering an execution speed of 300 milliseconds and a competitor who is

Thrower: For some buy-side customers,

efficient will drive out the inefficient. This is

speed is essential – it is often the rationale

especially true in FX trading, where an off

behind their trading strategy – i.e. spotting

market price, a late quote, or a few incorrect

arbitrage opportunities and exploiting

settlements can rapidly effect the business

them. So scalability and performance

profitability and reputation of the buyer.

needs to be built into the technical

The result is that arbitrageurs, dissatisfied

architecture of the eFX platform. This is not

customers, penalties and late charges

something that can be added as an after

quickly punish the un-savvy. Conversely,

thought. Scalable n-tiered architectures

the price-makers with sophisticated pricing

don’t grow out of traditional two-tiered

engines,

their

architected systems – they need to be

positions, broad instrument offering, and

designed from inception. Our n-tiered

intimate knowledge of their customers and

architectures have been proven for tier one

their credit quality will overpower the weak.

volumes.

This has been demonstrated over and over

moment is the latency and variation of

again as inefficient dealers have been

supplying market prices directly to clients

driven to exit the market.

and portals, which creates arbitrage

control

Davies: Standards are the single most important agent driving STP. TWIST has played a pivotal role in the past few years in designing open standards that facilitate straight through processing by effective integration of treasury systems with FX trading platforms.

able to transact in 100 milliseconds.

amongst the FX sell-side?

meticulous

Standards such as FIX and TWIST are very valuable in increasing levels of STP. How might they play a more strategic role in the market, perhaps by broadening the appeal of online FX and drawing in more active buy-side participants?

of

Another major issue at the

opportunities for some very clever people Naib: Simply, the faster and more robust

on the buy-side.

the engine, the more likely a client will

inefficiencies need to be dealt with,

be willing and desiring to use that

particularly in the extra price distribution

electronic platform. Robustness in terms of

steps required to get to portals.

We believe that these

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FIX’s contribution to furthering STP is the development of technical specifications for electronic communication of FX trade-related messages. Standardized messages and connectivity allow a transaction to be entered once and properly flow through to all the participants in the transaction chain with minimal processing errors. The widespread adoption of standards in foreign exchange trading will accelerate the rate at which new technology is embraced, benefiting the entire industry. Naib: The equity world has lived by the FIX standards for many years with demonstrable improvements in liquidity as a result. The rest of the product markets will follow suit and pick a standard. The greater the adoption of standards, the more easily firms may enter the market, increasing the overall liquidity of the online FX market. Maccaba: FIX is extremely important – it’s enabled active equity players to fully engage with foreign exchange as an asset class.

FORUM This has been a key factor is enabling the

One of the strengths of FIX is its balance

huge growth of the US markets as FIX is

between standardization and flexibility.

the dominant standard of the traditional

The FIX protocol will continue to act as a

fund market. All together FIX has been a

force behind increasing automation in the

vital strategic initiative.

FX market. However, the FIX protocol is one of a number of standards that will

Thrower: If you reduce the number of

eventually play an important role in the

times an FX trade is touched, not only do

future development of the market.

you improve operational efficiency, but you also reduce operational risk. If you

Naib: Perhaps not requiring but certainly

can use standards like FIX, TWIST, FpML

encouraging standardization, perhaps

to establish a common language, a lingua

through lower pricing. The use of a

franca, you can eliminate the need for

standard protocol like FIX lowers the cost

trade capture for both sides of the trade.

of doing business.

In a complex multi-client, multi-bank market, where margins are thin, such as

Maccaba: Yes, increasingly the buyside

the FX market, using a common language

evaluates counterparties not just on

to integrate with many counterparties can

availability of prices but also the quality

deliver

for

and content of their online offering. We

a

are now where the cash management area

common language, and hence to embrace

was a few years ago. The buyside

standards, becomes even more apparent

increasingly wants to guarantee minimum

when looking at a multi-client multi-asset

standards in terms of their electronic

class trading environment.

trading environment, as a result the bar is

major

participants.

efficiency

The

need

gains to

speak

continually being raised and potential Lam: The fragmentation in the FX world

counterparties have to meet the minimum

has not only led to many different

threshold to remain in consideration.

specialties among liquidity providers, but also to a disparate variety of interface

Thrower: Yes, we see this already. If I am a

languages. Part of the consolidation

buy side firm I don’t want to talk FIX to

process in the FX space is the adoption of

bank A, FpML to portal B, a proprietary

standards

with

protocol to bank C and TOF to bank D. This

different providers and liquidity pools. FIX

is just a major overhead. I want my FX

has recently played an important role,

providers to speak a common language.

owing to its ease of adoption and its

XML helps to some extent, but there are

existing presence in both buy-side and

still too many XML-based standards and

sell-side firms for a variety of other asset

also many proprietary protocols out there.

classes. The adoption of FIX also eases

The challenge for the FX providers is that

networking

some

with so many potential standards, they

providers discount FIX traffic and lower

still need to speak multiple protocols to

implementation costs.

support their clients.

Do you expect to see more buy-side

Lam: I think it’s fair to say that at the

clients applying a minimum technology

moment the FX markets are playing

threshold to their counterparties, for

catch-up with regard to FIX, compared to

example requiring that they be FIX

other markets’ adoption. A number of

protocol compliant to promote STP? If

counterparties will want continue to see

so,why?

this evolve further.

to

ease

interfacing

constraints,

as

However, FIX is

merely a messaging protocol; it does not

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Davies: Yes, because proprietary and

take into account the liquidity dynamics

customized protocols are increasingly

provided by differing pools of liquidity, be

being viewed as inefficient, costly to

they within a single asset or spanning a

manage, and prone to risk.

The FIX

consolidated view across asset classes.

protocol provides messaging specifications

Certainly the buy-side will look to adopt--

which facilitates electronic communication

or require their sell-side brokers to adopt-

between counterparties and also plays a

-technology and tools that brings real

critical role in end-to-end STP.

business and/or competitive benefit to


>>> offerings became more standardized, the importance of unique technology fell to the point that third party vendors were increasingly used to lower the cost of technology. Alliances will take place based on which third party vendors provide cutting edge e-trading technology, stability, and a more robust system. This will act to remove the technology barrier to entering the market, as you will be able to buy needed technology.

Mark Davis

“Standards are the single most important agent driving STP.”

them – either in the pre-trade, STP or post-trade process. But while FIX might be the current minimum technology threshold, we foresee the development of advanced technologies that can handle

Maccaba: We will see more banks buying “best of breed” technology solutions from a smaller, consolidated number of vendors and then customising key modules, rather than building from scratch. The technology is now so advanced that there are fewer banks reinventing the wheel, and more banks putting their competitive dollars into customisation and differentiation.

the specific demands and idiosyncrasies of the FX market. With the entrance bar to providing eFX services now raised so high, is it likely in the future that more FX providers will partner with best of breed technology suppliers

to

share

the

burden

of

providing the next level of buy-side requirements and if so what form might these alliances take? Davies:

FX

providers

are

already

partnering with best of breed technology suppliers. This is a major trend because the banks, for instance, finally realized that it doesn’t make good business sense for them to develop their own solutions and maintain them into perpetuity. They need to concentrate on creating new value-added services, because most transaction

based

services

are

commodities. In order to offer these services, they need to have the best technology available and get it to market quickly. Development takes too much time, money, and effort. Buying off the shelf solutions and ‘white-labeling’ them is a much more efficient way to bring new services to market. Naib: More and more FX providers will contract for eFX technology. This has happened in other markets where initially home grown technology gave an advantage but as time went on and

Thrower: Outsourcing technology to a best of breed supplier has always been a way to reduce time to market and reduce IT costs. We see both the FX market and the vendor community consolidating. This is causing the market to increasingly revolve around a smaller number of players year on year. This consolidation enables the remaining technology providers to invest greater amounts in R&D and to bring new and innovative products to the market. It is also enabling the tier one banks to leverage their technology investments by white-labelling to other financial institutions. This is becoming a very small market – despite its size – if that’s not contradictory! As the challenge for ever deeper functionality is felt from both the buy and sell side, the choice of which vendors to select also becomes more challenging. Taking a best of breed approach is critical for FX providers seeking to offer the best technical solutions to their clients. It is with this in mind that Wall Street Systems earlier this year forged an alliance with Cognotec. Under this arrangement, Wall Street Systems brings the best of breed post-trade solutions, while Cognotec provides the market leading e-trading solution. Under this partnership, financial institutions can deliver the most efficient, functionally rich pre- and post-trade solution to an ever more demanding client base.

Lam: We see this as happening already. That said, the question of tactics regarding a buy, build or partner strategy is always there for the sell-side. FX providers gravitate into two groups; those that want to maintain and control the whole process including the technology platform, and those that decide to concentrate on positioning their liquidity activities to service clients and add value to their shareholders. For the latter, technology companies can provide core and constantly evolving capabilities that relieve them of the burden of developing, maintaining and operating a best-ofbreed trading platform in house. This is especially so as buy-side traders increasingly look to execute in multiple asset classes from a single platform. And it is much faster and easier for a technology provider to migrate their trading capabilities in other asset classes to FX than it is for a liquidity provider to try to add this new capability to their existing proprietary platform.

Farid Naib

“Most sell-side firms develop asset class fiefdoms internally” Consolidation amongst some FX providers is starting to take place. What impact might this have on technology vendors and will their future growth prospects largely revolve around servicing the connectivity, integration and trading needs of existing FX market participants or will the arrival of the new wave of players be likely to create significantly new and exciting business opportunities? Davies: Consolidation should lead to expansion of the services offered and integration between various services/ systems.

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THE

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This is what we see with most financial institution mergers today. The real winwin comes when, rather than selecting just one of the two offerings, the services are merged to create the best of both platforms. This benefits both existing users in terms of continuity and the market in general with a broader capability. Fewer providers should mean greater efficiencies of scale for the vendors, enabling them to invest in offering new services and technologies to attract and retain customers.

Brian Maccaba

“We will see more banks buying “best of breed” technology solutions from a smaller, consolidated number of vendors and then customising key modules,” Naib: Any consolidation is invariably painful to technology providers. The coming wave of consolidation will create new competitive challenges for technology providers, which will be offset by the still vibrant growth in demand for eFX technology and the expansion into other asset classes. Maccaba: In my view, the consolidation in the marketplace is overstated. The market has grown in absolute terms and automation has allowed the communication channels between large and small banks and margin traders to be opened up. As a result, the market has changed shape – there are new, more defined roles, and as a result more niche players – this has replaced the old order of every participant trying to do everything. For instance liquidity provision has been uncoupled from distribution, allowing some participants to offer key liquidity in a smaller range of currencies while outsourcing the rest under a white labelling agreement.

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FORUM Thrower: Liquidity is becoming more focussed around an ever-smaller number of FX providers. It is a special technology firm, with a unique value proposition that enables its tier one clients to innovate and capture market opportunity that will win in this market. For technology providers, we need to be able to offer a broad range of technology solutions, from trading through operations, from integration to functionality. At the same time, tier two and regional banks are also carving out their own niche. Here the focus is on their long term client relationships and deeper business integration, and on providing a local spsecialised service. eFX plays a role in this segment also. We are seeing banks at all levels drive forward with their etrading vision – its not just about the top five. There is is always room for new players that are really focused on providing top-notch, value-added services to their clients; in the end, client service generally wins the day in the long haul. Lam: We believe the current consolidation and imminent industry change will lead to greater choice, benefit, competition and different models – both access to liquidity and commercial. For technology companies like RealTick who are brokerneutral, the flexibility to provide different commercial models could lead to increased opportunities. While we have seen relatively new entrants into the market on the liquidity side, providing ECN, streaming and other types of liquidity access, the market’s exploration and interaction with differing types of liquidity pools is still ongoing. Technology vendors are in the short term more likely to be driven by client demand for access to all these differing pools. In such a highly competitive market as FX, providers are constantly under pressure to improve the latency, stability and flexibility of their online FX transaction platforms and services. Going forward, where do you expect technology suppliers to be asked to focus their research efforts to develop the next generation of eFX solutions? Davies: The wave of the future is to provide solutions that are easily deployed, and easily integrated with existing and future technologies.

Rapid deployment is becoming a real differentiator in selection processes, whether it’s a broker, bank, or corporate making the decision. Delivering software functionality as a service (aka ASP) by nature is easy to implement because there is little or no IT infrastructure requirement, beyond having an Internet connection. The other need is for easy integration with other systems - the more the suppliers provide plug-and-play, the more they will sell. Developing products with 100% straight through processing as a goal is going to be essential in the next generation of eFX solutions. Naib: The next wave of innovation for technology providers will most likely be focused on solutions that provide: • Better connectivity through flexible interface tools

more

• More Cross Asset Class services • Further delivery of STP for the management of a trade’s life cycle Bottom line is that that FX providers will continue to pressure technology suppliers to expand the concept of STP, which will ultimately create new and innovative business opportunities.

Mike Thrower

“Outsourcing technology to a best of breed supplier has always been a way to reduce time to market and reduce IT costs.”

Maccaba: There have been three key price delivery models over the last decade. The first, request for quote, will in our view become almost redundant over the next two years. For several years we have seen Indicative Streaming Models which offer


streaming rates in screen, but have a RFQ pricing engine in the background. This is an intermediate technology as it offers only the appearance of price streaming, and often lets clients down when prices prove to be unavailable. The latest price delivery model – Executable Streaming Rates – offers true streaming rates at guaranteed prices. These can be executed at a single click with zero latency. The market is currently in the course of moving to this model as the active and margin trading community demand the time and transaction efficiencies it offers.

Rustam Lam

“The fragmentation in the FX world has not only led to many different specialties among liquidity providers, but also to a disparate variety of interface languages.”

Thrower: Wall Street Systems see three key priorities for the future; expanding lifecycle coverage, going cross asset class in a client-centric model and doing these two with highly scalable, performancedriven solutions. The technology vendors that crack this will be key partners for the FX providers of the future. Lam: Multi-product trading, advanced order types and management and the application of algorithmic trading are increasingly gaining traction. Technology providers will need to respond in a number of areas including, where appropriate, providing consolidated views of market activity and liquidity. This will require their systems to be scalable, have the ability to cope with exponentially growing quote rates, and be able to present complex capabilities to the user in a functionally relevant and easily usable form.

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Online Technology - a key differentiator for Trading arcades and prop shops

Heather McLean is a freelance writer.

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In the late 90s, when the London International Financial Futures Exchange (LIFFE) was forced to change from an open outcry to a fully electronic exchange, arcades were born. The closure of the Liffe floor meant that over only a few months, there were literally hundreds of traders looking for a desk to trade from. Small companies sprang up in London, where the market has now reached saturation point. From the UK, this model has spread across the world, and it is now eyeing up FX as a tasty new liquid and volatile market.


>>> Once trained on an electronic FX

In a trading arcade, traders will

further use of the infrastructure it

platform, traders have two main

commonly pay a seat fee, accept

is already paying for to connect

choices on where to take their skills.

reduced commissions and split profits

to

Either to a trading arcade, where

with the house, in exchange for a seat

Archelon’s investment and provides

traders work their own account, or a

in a trading room with the technology

diversification

prop shop, where the trader works

and resources they need to enable

Koltes, the managing member at

the shop’s account. FX is spreading

them to work their own account.

Archelon Group, states. In return, the

through the electronic trading rooms of the globe.

exchanges.

This of

balances

income,

John

new arcade traders at Archelon will Proprietary shops

be given the infrastructure, capital,

For the more skilled trader, it may be

clearing arrangement and admin

possible

cover they need to support trading.

to

win

a

place

in

a

proprietary shop. Prop shops take on traders to work its own account. Because of this self interest, prop shops tend to invest a lot of time and money in sourcing the best traders, training them, and providing them with state of the art technological tools to aid their trading. Ray McKenzie

There are a myriad of hybrid versions

Ray McKenzie, director of FX products

among prop shops and arcades,

at

Exchange

depending on how the founders want

(CME), explains: “In the futures world,

to invest in their traders; an arcade,

the number of these prop shop and

for instance, may cultivate better

arcade firms are growing very fast.

traders by increasing their training or

The models are good, and they can be

investing in their kitty.

Chicago

Mercantile

applied over multiple asset classes.

John Koltes

“It’s a combination of technology and deals that makes you attractive to people as an arcade,” Koltes explains. “If you’re providing someone with technology that can give them an

Maybe just one year ago these

Achelon is a prop shop hybrid; while

advantage over the competition, you

companies weren’t involved in FX at

its prop shop employees trade FX

should be able to offer them less in

all, but they are now becoming major

already, the firm is in the process of

payment

players.”

setting up a trading arcade to make

business faster and better.

for

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able

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to

do

111


Online Technology - a key differentiator for Trading arcades and prop shops If the technology is automated and allows the traders to do very fancy things, it can be very valuable for them. They’re the ones making money.” What’s best for the FX trader?

Arcade quality varies wildly, Shaun Downey, director at Oasis Research, a specialist technical analysis business focusing on FX, says. Some are no more than a clearing business and do not care whether they make money or not.

Others are run with more concern for the traders though, he says and the best of the model err towards the prop shop format. “I’d definitely say the prop shop model was best for the FX trader,” Downey comments. “Arcades are scalping for two or three ticks. But you need to have a calm environment and decent technology

Christopher Morris

and software with fast updates. Sharing screens and updates, as happens in many arcades, is not conducive to good work.” Saxon Trading is a prop shop, and

“We passionately care about the trade, so we educate the trader. We give him access to a psychologist, the best market information and direction if he’s not being successful, to increase his ability to trade.”

that is the only way to be according to Christopher

Morris,

development

director at Saxon Trading.

Morris comments on eFX: “In recent times, it’s become easier to trade in an e-environment. With the various platforms now available, we can trade online and manage risk in a

Shaun Downey

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more effective way. For eFX, what’s


>>> really improved the e-environment is

McKenzie continues: “Our equivalence

Changing the marketplace

platforms such as FXall, whereby

product converts futures trades into the

Prop shops and arcades have changed

banks collaborate together so trading

cash equivalent. This takes away the

the marketplace, Larry Schulman,

can be done in a more efficient way.

mystery of futures trading for people

founder of Chieron Trading, agrees. He

that don’t really understand futures, so

says there is more liquidity in the

traders more familiar with hedge funds,

market as a result of them, and that

for instance, can see the liquidity and

will make customers of the big banks

transparency’s there, making them feel

begin to look for alternative ways to

more confident to trade.”

trade in vanilla areas.

It’s

certainly

opened

up

those

opportunities in terms of counterparty trades. As the FX market develops electronically, it has allowed more participants to understand a little better the nature of individual risk,” Morris

continues.

“Before,

that

couldn’t be done; FX trading was for

Changing the sell-side

people with huge balance sheets. But

Prop shops use fast and nimble

the development of e-FX trading has

technology that in some cases is

led to greater understanding of risk and better due diligence, making it easier to trade.” Impact of eFX technology

superior to banks. This enables them to make fast changes when required, which in turn is forcing banks and other platforms, like Reuters, to change the way they work so they keep up, McKenzie says. “The buyside and sellside

are

converging,

because

Larry Schulman

banks’ customers, the prop shops and arcades, have their own expertise in FX technology and algorithmic models, changing the old way to trade FX of

“They are no longer held hostage to that one pool of liquidity as they can get pretty big deals done outside of the banks now,” Schulman states.

sitting at a spot desk and waiting. The

Pat Kinsel

buyside is becoming more savvy in the

eFX trading will become a big area for

sellside marketplace, so the sellside is

prop shops and arcades, Downey

having to be more like the buyside

states, because the flurry of e-trading

to compete.”

houses working the futures markets has all but destroyed the volatility that

Pat Kinsel, senior currency trader at

asset class needs to be attractive. He

Interbank Group, adds: “Technology as

explains: “As arcades have become

a whole is improving the average

bigger, they have dominated certain

trader's abilities. The e-FX trader now

futures contracts with so many people

has access to better charts, analysis

after one tick, so killing volatility.

tools, more instant price feeds, and

Before its demise, Refco was looking

constant or instant news on the internet.

at moving into the spot FX market for

People are no longer trading blindly or

arcades, because of the liquidity

without the proper technical tools. They

there.”

have the ability to educate themselves unlike any other time period.”

Downey continues: “Arcades and prop Kevin Parker

shops have to go into FX and spot FX,

eFX technology is opening up FX

Kevin Parker is an account manager at

because the liquidity and volatility has

trading in prop shops and arcades,

hybrid

gone from their other markets, in the

making this asset class simpler and

Xconnect Trading in the City of

European

London. He agrees banks are changing

especially in spreads. They shouldn’t

more accessible to traders with little FX experience. Algorithmic trading is a big trend in arcades and prop shops, McKenzie states. “One of the biggest things we see going on today is

prop

shop

and

arcade,

the way they work, looking at eplatforms for trading FX that will enable them to package up the small

interest

markets

and

be able to dominate the FX market as it’s just too big for them.” John Howard, independent consultant

algorithmic trading, for statistical

bits of business that they never used

arbitrage. Systems are looking at

to be interested in. “They’ll be

Financials, agrees that the volatility of

stocks and trying to buy stocks on the

hoovering up all the small tickets into

the markets currently dominating the

variant between stocks. It’s very easy

bigger

arcade scene is diminishing, opening

to modify and apply to FX.”

comments.

tickets

in

no

time,”

he

to arcades and prop shops at JH

the door for eFX trading:

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Online Technology - a key differentiator for Trading arcades and prop shops “Some would argue that rather than

fractionalised

being a benefit to the market by

widespread and diverse, so you have

and

platforms

are

providing liquidity, that the arcades

to go for bespoke solutions to be able

are systematically killing off the

to trade FX electronically.”

opportunities in the instruments they

John Howard

trade. I would say that it is likely that

This makes a Catch 22 for traders and

FX, being hugely liquid and less time

the progression of eFX in prop shops

zone sensitive than futures markets,

and arcades, Parker states. “It’s very

will become a key focus for the

rare that you’ll see a trader change his

arcades over the next two years.

trading tool and trading button, which

Given the enormous existing depth of

is why arcades offer different front

liquidity in the majors, whether we

ends to suit different individual

will

of

preferences. FX isn’t so mobile

out’

because it’s proprietary, making it

see

the

opportunities

same being

pattern ‘arbed

remains to be seen.”

hard to trade.” However, Parker adds that many platform vendors are now

Parker says the eFX online

adding eFX-specific functionality to

trading environment still has

their technology, so the future could

a long way to go. “The FX

be bright for eFX in arcades and prop

trading

shops.

market

is

still

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Automated trading solutions – the FX trading of the future Back in the year 2001, when our first retail client developed and ran his strategy in a fully automated way, it seemed like a technological miracle. Since then system trading and fully automated execution became buzz-words in the trading industry. Nobody is asking the question of why system and automated trading maximizes trading revenues and efficiencies, but what software does it best. There are two major groups of strategy users: sell-side and buy-side users. Sell-side are strategy developers (vendors) and brokers; and buy-side are institutional and retail traders. In this article we will discuss how system vendors can implement their trading systems and how retail and institutional Dr. Anna Becker, co-founder and CEO Strategy Runner

traders can automatically execute these strategies.

How to implement a Trading

2) Script Language IDE

System

(Integrated Development

Suppose you have a well defined algorithm of your trading system. You should now choose a software platform for your system implementation. The software tools can be divided in three major categories: 1) Raw API solutions, 2) Script language IDE and 3) Strategy-Oriented API suites. Let’s see what each category of tools can offer and what kind of needs it suits better than the others.

Environment)

1) Raw API solutions

Disadvantages: The disadvantages

Description: Provide basic functions such as getting data feed and sending orders. This solution is provided by most of the major Forex brokerage houses and some independent software companies such as TradeRobot. Advantages: The only advantage of a raw API solution is its low price. Sometimes, you can even get it for free. In most cases it’s a FIX compatible protocol for sending orders and a proprietary API for data feed.

Description: Provides a relatively simple way for creating the strategy logic using proprietary scripting language. known

Script

The most

Language

is

EasyLanguage from Trade Station. Advantages: The major advantage is fast a development time. You can also debug and back-test your strategy with historical data.

are slower order execution speed and script limitations. Very often it becomes impossible to implement a trading strategy in the exact way it was planned, because of missing features in a particular script language. While this solution is suitable for most traders, it is important to check if it fits your demands for speed and versatility. 3) API suites based on high level program languages

Description: Provides a simpler way to program your strategy Disadvantages: The disadvantage of a raw API solution is a very

than that of the raw API method, however, it is still relatively more

long and costly development course which normally takes

complicated than Script Language IDE. The best known solution

several months to one year. You might not only need to build

from this category is the Strategy Runner product suite.

your own connectivity level, but also monitoring, back-testing, logging and risk control utilities.

Advantages: It provides fast order execution times and the versatility of a raw API. Strategy Runner product suite also provides fast and

We would advise this solution only for big IT department(s)

accurate tick-by-tick back-testing, live user-friendly monitoring of

wanting to build their own automatic trading infrastructure.

strategy performance and strategy-oriented risk control tools.

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Automated trading solutions – the FX trading of the future Disadvantages: The only disadvantage of this approach is that one has to be proficient in high level programming languages such as C++ or Java. The solution is best suited for an IT department, which wants to use third-party strategy automation solutions. Independent system developers and traders may consider ordering implementation of their system from Strategy Runner’s strategy development department. Figure 1: Strategy Runner Architecture – 1) strategies are executed on SR

Automated Execution of Trading Strategies

In the previous section we discussed different implementations of trading strategies. If you have implemented your system with a

Server, 2) Clients can monitor their performance through SR Console

Strategy Runner - Strategies developed in third party applications:

raw API, then your automation will be as hands free as you have

Strategy Runner’s TPAK is a software package that provides

designed it. However, if you chose other implementation tools,

automation of strategies developed in third application such as

now comes the question – how

Excel, TradeStation etc. As in the

do you want your strategies to

case

be executed?

applications strategy developers

of

other

client

based

have to run both application that There are multiple platforms

generates signals and TPAK itself

that

signals

to transmit this signals to SR

originated by your strategies to

Server; TPAK is different from

your live account, taking away

other client side application in the

the need to place these signals

way

manually; all these companies

originated, they will automatically

use the “Hands-Free trading”

be distributed and executed on

slogan that has become one of

each subscribers’ account.

can

transmit

that

once

orders

are

the leading terms for strategy automation tools.

For

Strategy

Developers

it’s

hands-free from typing in the Some companies offer the

orders, but not hands-free from

individual trader automated

your application that generates

execution of his strategies on

signals, and not hands free from

his

your

live

account

brokerage whether

of his

his

at

the

choice;

strategies

are

developed using their native API’s or in third party engines (e.g., TradeStation, eSignal,

TPAK

application.

For

Strategy Subscribers it’s handsfree from typing in the orders, additionally it’s hands-free from application that generates signals, and finally its hands free from your SR application (SR Console).

MetaStock, etc). Let’s examine this "hand’s-free trading" concept by looking at the Strategy Runner solution in detail. Strategy Runner - Strategies developed in SR API:

The Strategy Runner server at the broker's site originates and executes the trades generated by all strategies, in all their respective subscribers' individual accounts. Each individual subscriber can monitor and control the execution of their

Figure 2: The TPAK flow: (1) Application that generates signals & TPAK – (2)

strategies through the Strategy Runner Console. As indicated in

SR servers – (3) live account(s)

the previous sentence “Each individual subscriber can monitor” – where the word is CAN, and not HAS TO.

Summary

As we illustrated in this article there are many automated trading How hands free is it? It’s hands-free from typing in the orders,

solutions for both buy side and sell side users. We believe that

also it’s hands-free from using an application that generates

future of FX trading lies in system trading and futher automation

signals, and it’s also hands free from your Strategy Runner

that will both empower institutional traders and strategy

Console application.

developers, and level the field for retail traders and investors.

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Traders Workshop Slippage Greg Michalowski, Vice President of Trading at FX Direct Dealer, talks about Slippage in Foreign Exchange trading and how to minimize its impact. Slippage defined:

In this situation, it would not be unusual to

Slippage can be defined as the difference in

have slippage on the trade. The order of events

rates between where a market entity desires to

clearly outlines the reason for the slippage.

execute a trade/order and where the trade/order is actually filled. It occurs in Stop and market

1. The market is 1.1800 bid

orders. For example, it is 8:29 a.m. EST and the economic data release change in Non-Farm

2. The data release causes the market to sell

Payrolls (NFP) is to be released in one minute.

off rapidly in a market that has suddenly

The market is trading at 1.1800 – 1.1802 and

become very thin and wide

stable. You have your Sell Stop at 1.1795. 3. The first electronically generated price At 8:30 a.m. NFP is released and is much

fractions of a second after the release is

stronger than the market’s expectations (a

1.1790-97

situation where the EUR would weaken and the USD get stronger, leading to a lower EUR/USD price). In the space of the first few seconds after the initial headline, the bid on the EUR/USD drops from 1.1800 to 1.1790, to 1.1785, 1.1784, 1.1782, 1.1775 and 1.1765, before rebounding and continuing on a volatile up and down trading pattern with a downward, market bias. What happens with your Sell Stop order at 1.1795?

4. The electronic Sell Stop at 1.1795 is triggered when the bid hits 1.1795 or lower. In this case the bid that triggers the order is 1.1790 5. A Market Order is sent electronically to sell at the market (really at 1.1795 or whatever the market offers) 6. If the best electronic bid is 1.1790… 7. The Order is filled at 1.1790 (Note that the price could even be worse than 1.1790 should the price change again ) So, if a Sell Stop in the EUR/USD at 1.1795 gets filled at 1.1790, it results in a five (5) pip slippage. Market overview:

Slippage occurs in other markets besides the Forex market. In order to get a better handle on the concept of slippage, it would be helpful to understand how pricing, market conditions and volatility affect these markets, especially in foreign exchange. 12-13-05 FOMC Announcement One-minute Chart

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One of the most misunderstood concepts of


>>> trading is where and how FX pricing originates. Like an inverted funnel, traders receive streaming prices from a dealing platform like FXDD, who in turn get their price streams from several major banks. Depending on the bank, they may receive liquidity from several sources, but ultimately the feeds that they provide downstream are derived from the interbank matching platforms EBS or Reuters.

EBS executes the vast majority of interbank volume in the Euro, Yen, and Swiss pairs, while Reuters’ strength lies in the GBP, CAD, AUD, and Exotics. The banks, which are prescreened for bilateral credit, can enter or deal upon bids and offers in the matching platforms. The feeds that the banks send out very closely mirror the prices on these two matching platforms.

Tips on preventing Slippage:

Slippage is a fact of trading. It is inevitable but it can be FXDD and similar retail platforms receive continuous pricing

managed. By understanding why it happens, you can minimize

regardless if they are traded upon and then send this retail

its impact.

pricing to its forex customers. So, as prices change at the banks, retail clients receive pricing that as a result of

1. Select a broker that has reliable feeds. In volatile markets,

consolidation, competition and technology, are not much

prices can change up to three times or more per second in the

wider than those in the interbank market.

interbank market. 2. Don’t trade during economic releases such as employment

Certain situations, such as economic data releases or

statistics or during volatile markets unless you’re willing to

geopolitical meetings, may cause uncertainty and volatility in

accept slippage.

markets creating what is known as ‘gapping markets.’ The overriding characteristic of such markets is a temporary lack of liquidity, or a ‘thin market,’ resulting from fewer people being willing to place bids/offers.

3. Use risk management: don’t overexpose yourself. 4. Be aware of the actual market through various price sources. Retail pricing in volatile markets should reflect closely the interbank market. If unexplained spikes (or

When there are more buyers and fewer sellers, prices increase;

irregular variations) occur, you should question your broker.

conversely, when there are fewer buyers and more sellers,

Note: a few pip spread is normal but having 5-10 pips away

prices decrease. For example, if you want to buy at a price and

(on major currencies) from the interbank pricing is not.

there are no sellers, the market will gap until sellers appear;

Much depends upon the state of the market at the time.

you may complete the trade at the next best price. Therefore,

5. There are several key indicators of how a reputable firm

the lack of participants translates into market uncertainty,

should transact business, which should result in less

which leads to wider spreads and more volatility.

slippage:

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121


REPRINTS PRINT OR WEB VERSIONS

Traders Workshop

Slippage a. Provide reliable and expeditious execution. b. Prices are streaming and executable. c. Offers a fast round turn on execution time. d. If you hear complaints about a particular firm, pay attention and investigate further. e. Check if your broker has a retail platform with liquidity that can be scaled to encompass institutional customers. f. Check if your broker provides, or has the ability to do so, liquidity to third parties (e.g.,

hedge

funds

and

institutional

investors). This indicates a secure and stable firm since itâ&#x20AC;&#x2122;s difficult to obtain vast liquidity. g. Technology that delivers accurate pricing is more reliable. Stops and Trailing Stops should reside on the server, not on your desktop. h. Provides

executable

and

reliable

pricing during volatile markets; if filters are involved, you will miss all the prices in between. i. Check if your broker has a good working relationship (i.e., established credit lines) with top-tier banks. j. If possible, visit your broker -- get to know who you are working with. Slippage conclusion

Markets,

especially

those

that

trade

electronically like the forex market, are not static and are therefore subject to slippage. Experienced traders understand the conditions when slippage is most likely to occur, and either avoid trading during periods of extreme volatility or accept it as part of the risk/reward trading profile. As a market maker, FX Direct Dealer is committed to providing all our clients with transparent market liquidity at all times.

To order reprints of any article in e-Forex or request further information please contact:

Although slippage can occasionally occur, it is a direct result of market volatility and an increased risk/reward profile. If you feel that your market liquidity is any way being manipulated or in any way not congruent with

Tel: +44 (0) 1225 868 947 Fax: +44 (0) 1225 868 998 Or e-mail: Helen@Aspmedialtd.com

fair trading practices at market prices, you should not hesitate to you to speak with your liquidity provider.


Case Study e-Forex Case Study 124

eFX technology – helping to minimise the problem of Slippage at Aspect Capital e-Forex talks with Anthony Todd, CEO and Robert Wakefield, COO at Aspect Capital, about the problem of Slippage and how automation and electronic FX trading technology is helping them minimise the problem. Can you give us some examples of how and when Slippage is likely to occur?

At Aspect, we believe slippage is only part of the problem. If we assume that slippage is only the cost of execution then its main drivers will be a function of trade size, liquidity and price momentum. It is therefore important that the trade sizes are appropriate for the given market. A trading desk’s ability to take advantage of liquidity

Anthony Todd

and price action will determine how

Robert Wakefield

effective it will be in driving costs Gentlemen, why is Slippage a

For these reasons, Aspect has

down.

At

Aspect,

we

are

concern to your firm and in what

heavily

developing

continuously improving the tools

way does it impact on your FX

its Electronic FX platform. Our

and technologies that we provide

trading operations?

objectives were to reduce trade sizes

the traders with, to help them

and achieve transaction anonymity

improve their decision making and

through direct market access.

automate the execution process.

What methods do you use to

Would aiming to minimise slippage

monitor it?

in volatile trading conditions be

Monitoring transaction costs is not

good enough or can orders slip for

only about checking a report on

reasons other than volatility?

The performance of any trading strategy

is

frictional

impacted

costs

by

associated

the to

slippage. Traditionally, slippage has

invested

in

been the main focus of any systematic

trading

houses.

At

Aspect, we are not only concerned about slippage but also about the entire

cost

or

‘true

cost’

of

implementing our strategies. Some costs

may

be

visible

and

T+1 to evaluate where you did well or less well. At Aspect, we like to know how we are performing in real-time, as the market moves. This allows us to change our

Badly implemented strategies will lead

to

excessive

costs

and

therefore degraded returns. Trade slippage can occur for a variety of

trading to suit the current market

reasons.

transactions costs’ elements that

conditions. We still look at reports,

constant pace of electronic market

are more subtle and less easy to

however,

to

growth mean that many of the

measure. An awareness of the real

understand the market dynamics

slippage’s variables are now more

cost of achieving a given position is

and to provide traders with the

controllable. It is not just about

ultimately what drives whether a

tools and technologies to help

controlling your trading operations

trade is as profitable as it could be.

them make better decisions.

in volatile markets.

measurable, but there are a few

january 2006

e-FOREX

as

it

is

crucial

Technology

and

the


In

what

ways

has

your

choice

of

electronic trading platform and use of trading

technology

assisted

you

in

minimising the impact of Slippage?

During the past five years, the rapid growth of electronic trading has provided a wealth of opportunities, especially to systematic traders. Firstly we have been able to disintermediate the middle man in most of our transactions. This allows us to respond faster to changing market conditions. There is also no information leakage to the market as a whole. However, the main opportunities come from an increasing ability to monitor the markets and respond in real-time to changing events. At Aspect, we have made a significant investment in this area. We have a dedicated team of six technology and research professionals that sit in the trading room, working with the traders. This blend of technical capability and market experience is critical in a modern trading room. For the first time, we see a realistic path to considerably reduce transactions costs; and we are already making significant progress in this area.

system iteratively. In FX specifically, there are a large number of systems from different liquidity providers. The technology we deployed in the trading room allows us to automate the decision making process giving us sub second reaction time to change price and liquidity dynamics. We believe that in a trading environment, a bespoke system will deliver a better solution.

execute are all designed to achieve best execution. To that extent, we are agnostic as to who makes the price upon which we will eventually trade. In this way, there is no doubt that the continuing evolution of FX towards an “exchange model” will significantly reduce the complexity and cost associated with achieving best execution. Do you think that with the development

Is your choice of counterparties and FX

and use of advanced e-trading technology

providers influenced in any way by

coupled with new trading styles, Slippage

whether they have reputations for best

can ultimately be prevented or will it just

order execution?

become less of an issue?

We do not execute a lot of volume through voice brokers anymore. Best execution is certainly a key component for our traders. The technology we deployed and the algorithms we currently use to

We believe that the ‘true cost’ of implementing a trading strategy can be substantially reduced. There is nothing in our experience so far that leads us to conclude otherwise.

Where would you like to see improvements in current e-trading technology to help deal with the problem?

When we started, we reviewed many third party systems. We finally opted for a bespoke in-house solution for all of our front end interfaces. Whilst there are some great systems available, none could really fulfill all our requirements in terms of asset class coverage nor could they give us the flexibility to develop the

january 2006

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125


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>>>

The e-Forex Interview

The e-Forex Interview

With Christian Baudoin, global head of e-Forex at BNP Paribas.

The “e-space” is growing bigger each day with new users, new requirements, new products and new channels. With a landscape in constant motion, it is essential to be able to rely on a 24x5,

Christian, as the leading foreign exchange bank in France, BNP

dedicated team with the widest e-expertise, capable of rapidly reacting to market evolution. The e-Forex services team is involved in many areas such as business development, support, promotion and distribution and risk management. The team contributes to the fine-tuning processes and orchestration of BNP Paribas e-FX strategy. We do this with the ambition of establishing BNP Paribas as one of the best and most efficient e-FX providers.

Paribas has made a very significant investment in developing your e-commerce products and services. Was that driven by direct response to client demand or is your strategy based around trying to anticipate your clients’ future requirements and providing eFX solutions to cater for these? BNP Paribas has been an early adopter of e-commerce,

Your client web site, FX Dealer, provides a full range of online currency services. Can you give us an idea of where you’ve recently been working to extend the functionality and features it offers?

participating in the launch of several multi-dealer platforms while implementing our own proprietary portal FX Dealer. With more and more customers adopting electronic channels, we have increased our investment in the “e-space”, to be able to respond more efficiently to client demands. BNP Paribas services a large range of customers with various electronic FX needs. Some of them were quick to embrace electronic channels and understand the benefits, rapidly becoming more and more demanding of products and functionalities. Partnering with the most demanding clients has enabled BNP Paribas to stay at the forefront of innovation and cater to future requirements of our global customer base. As a result, our FXDealer portal is constantly being upgraded with new features. You’ve recently formed a dedicated e-Forex services team. What prompted that decision and what do you aim to achieve with this initiative?

The content and functionality of BNP Paribas' FX Dealer portal is constantly being expanded, much of which is now driven by customer feedback. Indeed, the latest enhancement to the functionality is the customisation of the live spot prices display. Customers can now select how they view the live tradable prices coming directly from BNP Paribas' traders. The full list of currency pairs can be edited by the customer, so that they can view only the currencies they require. Alternatively, customers can specify currency blocks, such as USD majors, Euro Crosses, Asia, Eastern Europe and Latin America. In addition to the live bid & ask, when detached in its own window, customers can format the display further by requesting information including the open, high, low and close, as well as the percentage change on the day. But, probably the most powerful piece of functionality is the capability for customers to create and maintain their own list of cross rates, for which live prices are displayed.

january 2006

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127


The e-Forex Interview –

with Christian Baudoin

We reported in our last edition on how your own domestic market

We are currently working on upgrading our FX options platforms

seems far less commoditised than many elsewhere and that this

with one project on “live pricing” and another project on “deal

places particular emphasis upon bank relationships, which typically

execution”. We plan to release the first one by the end of the first

are very long term in France. Is the arrival of eFX likely to change that

quarter of 2006 and the second one in the course of the same year.

emphasis or the nature and way these relationships operate?

Going forward, we will increase our investment in Management Information Systems (MIS). By providing us with a detailed analysis

I do not think the “ vive la difference” reported in the October

of our electronic business, MIS will enable us to improve further our

edition of e-Forex will live forever. Indeed, the French buy-side,

offering and better service our customers. We are also expanding

like everyone else, is attracted by the benefits of the electronic.

the usage of algorithmic tools for proprietary usage and to offer

But this does not necessarily oppose a “relationship” way of looking

pre-thought out and auditable strategy for customers.

at business. In many cases, an efficient e-offering reinforces the relationship between a bank and its customers. However, some

Your bank has had a presence in FX prime brokerage for more than

customers still prefer to conduct their business traditionally despite

two years. Do you see it as a long-term growth market both

the emergence of the electronic channels. This is where the long

domestically within France and internationally and if so, where do

term relationship angle comes to play, we regularly update those

you see the interest coming from?

customers with the evolution of the electronic markets to keep them abreast with the changes and we hope to start e-relationships at their convenience.

The size of FX prime brokerage will continue to grow with the market and as long as credit-related price gaps exists. It plays a complimentary role in the e-FX value chain and allows the lesser-

Online-specific volumes in France are rising quickly. How much of this do you think is attributable to French corporate activity and do you anticipate that further volume increases will be mainly driven by

known participants in the market place to leverage onto a more competitive playing field by using prime brokers. The growth is coming form all directions but most of it is internationally driven.

the corporate sector or will the adoption of the e-channel by other buy-side clients and non-bank FIs, start to have a major impact?

Acting as a primary FX market maker has clearly become too expensive in terms of investment and capital allocation for many

The evolution of the e-landscape in France is in line with what is observed elsewhere. French corporates continue to be attracted by the e-channels but non-reciprocal bank demands are growing more rapidly. However, the bulk of our expansion is coming from outside France, a trend that is likely to continue. Being active in 85 countries, BNP Paribas has long had a very strong franchise in emerging markets – it is one of the oldest banking institutions in Asia, and is one of the top five traders in emerging market currencies. What plans do you have to leverage your e-trading capabilities in the emerging markets and extend your eFX services around the world? Indeed BNP Paribas is the leader in the emerging markets with a rare capability to settle more than 140 currencies through our global

smaller banks. Where are these smaller institutions going to be looking to derive their margins in the future? FX market making has clearly become a giants’ playground not only in the terms you pointed out but also in terms of the risk warehousing. However, the smaller institutions have been working with the primary FX market makers to source liquidity directly, electronically or via the existing price discovery channels. As long they have clients and good portfolio management, there will be a place for everyone. All participants will have to run faster, but in the end the good ones will still give good returns to their shareholders. How do you see the eFX market evolving in the next couple of years? Is it likely to be shaped by consolidation amongst online FX

network including of course Asian currencies. We are already

providers coupled with the arrival of increasing numbers of new,

distributing our liquidity for some of these currencies on our

more active, buy-side trading participants such as Hedge Funds?

Proprietary Channel and Portals that we participate in. We will enhance these before the end of this year with increased coverage

The market place will not stand still for long. In recent years, we have

on more regional currencies like SIT, LVL, LTL, HRK, EEK and TRY.

seen the convergence of the electronic platforms front GUI to offer

We will continue to do so wherever there is client demand.

streaming executable quotes. More recently it has been the ability of

Under our FX Dealer proprietary portal we offer a unique suite

clients on the buy-side to plug in their APIs directly into the liquidity

of comprehensive tools on more than 140 currencies. This is one of

pool of the larger market makers or into electronic market places

the most visited sections of the portal.

directly. Black box trading by buy-side clients is starting to make its impact on the tools that market makers use to gain new business.

BNP Paribas has also developed a strong franchise in currency

The volumes in this exclusive arena can be large and have the

options and derivatives. Your FX platform, FX Dealer, already

promise to provide the growth to the markets. Clients will go where

incorporates derivatives functionality in the form of research,

they can find providers who can accommodate their business and

historical volatility, and strategies. Are you planning to offer online

give the appropriate level of service. BNP Paribas, the bank of a

order execution for FX options and what are your other areas of

changing world”, will continue to offer its customers the best of the

investment going forward?

electronic as long as it brings value to all.

128

january 2006

e-FOREX


Danske Bank – always open for FX Danske Bank is the largest bank in Denmark and a leading player in the Scandinavian financial markets. The Danske Bank Group offers a wide range of financial services, including insurance, mortgage finance, asset management, brokerage, real estate and leasing services. Over 800,000 users rely on Danske Bank’s online banking and trading services – and of course, security and stability are always in focus. With excellent ratings at both Moody’s and Standard and Poor’s, Danske Bank offers a one-stop gateway to the top of Europe, and although our Scandinavian roots afford us a distinct advantage in the region they certainly don’t hold us back from further

Danske Trader

The online tool for FX spot, outright and swap transactions for a

international growth.

wide range of currencies, Danske Trader provides consistent streaming prices and a host of other valuable FX execution

Key figures from our 2004 annual report show:

services such as Quick Trade, split and block trades. • Total assets: DKr2,078bn Individually configurable, Danske Trader is extremely flexible and intuitive to use. Danske Orders is a part of Danske Trader,

• Shareholders' equity: DKr61bn

and allows users to view, place, amend and cancel profit and loss orders 24 hours a day. Individual settings mean you can

• Solvency ratio: 10.2%

receive notification of order execution via email or SMS, and • Subordinated debt: DKr34bn

track all your orders on the deal log.

• Core earnings for 2004: DKr12,682m

Easy access at all times and a high level of control are crucial factors built into Danske Trader, whilst Straight Through

Danske Bank – always open for FX

Processing and a high level of transparency, coupled with the

Within the realms of FX we offer a dedicated team focusing on

ability to view price streaming online, mean that you need never

global flow 24 hours a day. High-tech access to our services is

miss an opportunity.

available through all channels – Danske Trader, Reuters Dealing, and of course, by phone.

For further information please contact: Danske Markets Global Flow and Solutions Jesper Ronald Petersen, e-mail jrp@danskebank.dk or Claus Holmark Asved, e-mail cho@danskebank.dk Reuters DANO/DANX +45 3334 1003

Meet us at ACI Forex in Bremen from March 31 to April 2 2006

Sponsored Statement

Danske Bank is voted no. 17 FX Bank in the world and no. 1 in Scandinavia (FX Week/ RISK Magazine)


Ja Oui Si Hai Ne Yes

Eurex is now fluent in FX futures.

Introducing FX futures on Eurex US. With a 23-hour trading day, significantly lower trading fees and contracts twice the size of other exchanges, Eurex offers unique advantages for FX Futures. If you’d like to know more, we invite you to call us at 312-544-1100 or visit www.eurexUS.com.

© EUREX US 2005. U.S. Futures Exchange, L.L.C. (Eurex US), is a Delaware limited liability company. Eurex US is a designated contract market under U.S. law, a recognized overseas investment exchange in the UK, and a recognized exchange (“marché reconnu”) in France. Participants may also trade on Eurex US from the following countries: Austria, Belgium, Denmark, Finland, Germany, Gibraltar, Ireland, Italy, Spain, Sweden, Switzerland, and The Netherlands. Eurex US and its respective servants and agents (a) do not make any representations or warranties regarding the information contained herein, whether express or implied, including without limitation any implied warranty or merchantability or fitness for a particular purpose or any warranty with respect to the accuracy, correctness, quality, completeness or timeliness of such information, and (b) shall not be responsible or liable for any third party’s use of any information contained herein under any circumstances, including, without limitation, in connection with actual trading or otherwise or for any errors or omissions continued in this publications. Eurex US® is a registered trademark of Deutsche Boerse AG in Germany.


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