FinTechAutomationFX&MM Trade Automation in the Compliance Era

FX&MM Trade Automation in the Compliance Era

The role of the corporate treasurer has evolved at an accelerated rate in recent years. No longer the lone individual languishing in the corner of the finance department, today’s corporate treasurer is expected to also embrace the roles of financial strategy advisor, risk manager, FX trader and compliance officer.

These new responsibilities place a lot of demands on corporate treasury systems and have led to a reappraisal of underlying processes. Not all corporates have developed their treasury systems in a way that matches the needs of their treasurers. In many corporates the systems are a disparate mixture of manual processes, bank-delivered services, in-house developed technology and third-party software. Fragmentation is rife.

Consequently an increasing amount of attention is being devoted to creating a more coherent landscape for corporates. The blossoming market for on-demand services is primarily looking to bring together all of these disparate elements in a practical and integrated way.

Liquidity Demands

Treasurers are becoming voracious traders in the capital markets. As corporates become more international both in terms of their subsidiaries and their customer base, their liquidity demands are becoming more complex. Many corporate treasurers are turning to the capital markets and venturing into more complex instruments such as derivatives, structured products and credit-based swaps. But the asset class of choice remains the highly liquid foreign exchange market.

According to figures released earlier this year from the Bank of International Settlements triennial survey of trading volumes, the non-banking market has accounted for 40 per cent of the total FX trades from 2002 to 2004 and this is likely to increase over the next three years. While much of this growth is driven by the hedge-fund sector, it is estimated that corporates represents over 15 per cent of the total FX market volume.

As these trade volumes become ever larger, corporates have been looking to make their process more efficient. Trading volume is always the mother of straight through processing and corporates are increasingly embracing the concept. At the top end, the likes of the Fortune 100, the treasury departments are run like banks and they trade in their own right in large volumes and self-sufficiently. But for the vast majority of corporates, the main purpose of their FX trading is to provide liquidity. Historically these corporates have relied heavily on their FX banks and the manual processes that come with that. Prices are sought over the phone and orders are confirmed via fax. But things are changing.

Online Trade Execution

About five years ago a trend for online trade execution started to emerge. The banks started to develop their own online portals providing FX prices for all of their corporate customers. While this was very useful for the banks, the corporates, which typically sought prices from a number of banks, still had to endure the hassle of interfacing with each bank-owned portal in their search for the best prices.

The natural progression led to the formation of multi-bank portals where corporates could access several banks’ FX prices from a single source. The earliest example of this was Atriax, whose founding members included Chase Manhattan, Citibank, Deutsche Bank and Reuters. After struggling against sluggish adoption and low volumes, Atriax closed its doors in April 2002. However, its demise proved to be just a setback rather than a major catastrophe for the online FX industry, with the backers retaining their enthusiasm for online FX trading by moving on to provide liquidity to other portals.

The popularity of the multi-bank portals has continued to grow, both in terms of volume and providers, surprising analysts’ predictions that competition would be fierce and consolidation would be swift. Since the collapse of Atriax many others have emerged and continued to carve up the market and sign up the banks. There is now enough differentiation between the providers, it seems, for them all to co-exist for now.

360T, for example is an independently owned multi-bank portal serving the corporate market in Europe. Other services concentrate on specific sectors of the market or lead in certain technologies. Hotspot FXi, for example, caters to the institutional fund managers, while Currenex has pioneered the area of executable streamed pricing as an alternative to traditional RFQ (request for quotes) methods.

While the online services allow corporates to streamline the price discovery process, for those wanting to achieve fully automated trade execution and end-to-end STP, they also need to automate the post-trade process and link that to their front-end services.

The post-trade, back-office processes – order matching and confirmation – have typically been automated for much longer than most front-office functions, due to the fact that the vanilla nature of these processes lend themselves to the assembly line world of automation. Those working in the front-end have been less eager to forsake manual interaction; hence phone calls and faxes still prevail in many corporates. But developments in technology mean that it is now possible for corporates to link their front and back-office processes, without having to endure painful and convoluted workarounds.

The two major benefits that corporates are seeking in their treasury operations are efficiency and effectiveness. Historically the focus has been on the efficiency automation brings and the ensuing reduction of cost – either reducing the number of personnel or else reallocating their capacity to assume more strategic rather than administrative functions. However, there is now an increasing focus on the effectiveness aspect of automation and STP, specifically the ability to demonstrate the controls required by today’s compliance-centric regulatory environment.

Sarbanes Oxley and SAS 70

A typical corporate performs around 200 trades a month, many of them manually, faxes and all. But, thanks to compliance and also rising volumes, corporates are increasingly looking to improve the effectiveness of their trading operations. Sarbanes Oxley and FAS133/IAS39 are the two prominent regulatory demands on corporates, both calling for more reporting and greater transparency.

There is also a focus on reducing the exceptions and errors caused by manual intervention and achieving best execution. An important regulatory aspect of best execution is the segregation of duties, meaning that front and back-office have separate trading responsibilities and no one should be able to assume control of both front and back-offices.

While Sarbanes Oxley originates from the US, it is becoming increasingly influential in the rest of the world, as any company that has operations in the US will fall under the same stipulations as their US-listed counterparties. Key to both regulations is the requirement to know more about your counterparties, including vendors.

As more corporates look to outsource or sign up to managed services, there is a growing need for the vendor involved to offer at least as robust a control process as the corporate’s own internal standards. The easiest way to provide this is for vendors to work with external auditors to produce a comprehensive, trusted third-party audit, such as the SAS 70 standard. This audit and report should include an exhaustive examination of processes and controls, from the development of software, through account set-up, to how passwords are reset. An audit conducted under these conditions will be a more than adequate resource to convince a corporate’s auditors and regulators of sound business practice.

Future Development

The provision of end-to-end STP for corporates’ FX trading is only a preliminary step and there is a great deal of room for further development. An obvious move is to expand the concept to other instruments besides the FX markets, such as money markets and precious metals (a growing asset class but still many years behind FX in terms of automation and the removal of manual processes).

The second stage of development is to increase the range of application processes. While the online portals can be described as applications, the corporate market has found it much more challenging to justify the cost of installing software for risk management, cash management and other such functions.

The vast majority of the corporate market runs some or all of their cash and risk management on Excel, leaving regulators and auditors less than satisfied. Pervasive and flexible as Microsoft Office applications are, using them to run critical processes is less than robust, leaving massive room for development in this area.

A potential solution to the problem is to provide these risk and cash management services on a pay-as-you-use basis, delivering ‘software as a service’ rather than as a long implementation project that requires internal resources to maintain. This approach brings a number of key applications together in one accessible, centralised destination or portal, allowing treasury staff to access the same application and data from any location via a secure Internet connection.

Banks too are realizing the importance of aggregated services and are trying to cut down on the number of proprietary systems that they provide and instead look to satisfy the multi-bank demands of their corporate customers.

In conclusion then, both banks and vendors have realised that the key to corporate banking isn’t about trying to create lock-in through proprietary systems and platforms. Rather it is about solving the customer’s problems, removing their pain, and delivering on the twin promises of better effectiveness and improved efficiency.

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