Bridging the Mid-corporate Divide With E-trading
Despite the benefits e-trading provides to businesses of all sizes, many mid-sized corporates are still failing to embrace the opportunity believing that it is either a service for ‘larger’ companies or that it will detrimentally impact their relationship with their bank. The truth is that e-trading is for businesses of all sizes and, far from weakening existing banking relationships, it can improve them.
Many UK businesses don’t take advantage of the opportunities presented by foreign exchange and the money markets, largely because traditional off-line solutions can be too time intensive and therefore get pushed to the bottom of the priority pile. Others believe that e-trading is a potential relationship barrier between themselves and the dealers at their bank.
Whatever the specific reason, and despite the huge advances in online corporate banking services in recent years, Lloyds TSB’s own research1 suggests that one in three mid-cap corporates are still missing out on opportunities even though they could benefit from e-trading.
E-trading can create stronger bank and mid-corporate relationships in exactly the same way that it has done so for larger firms. By reducing the number of man hours spent processing and dealing with the details of commonplace transactions, online dealing platforms allow both treasurer and bank to spend more time considering long-term positions and exploring more sophisticated debt and investment strategies.
E-trading also adds an additional level of control providing quicker and easier access to both competitive foreign exchange and money market rates. Moreover, e-platforms help to maximise returns on excess positive account balances, i.e. through money market deposits, which can be for periods as short as overnight or up to one year. They can also be used for spot foreign exchange, for setting a forward rate for a future transaction or when swapping currencies for a chosen length of time.
Selecting the right platform to suit your deal criteria is crucial to e-trading success. Introducing a new e-platform for mid-sized corporate businesses should not be taken lightly, however, and therefore when looking to investigate and introduce an e-trading system, treasurers must audit both their existing and future treasury policies as well as the overall growth prospects for the organisation.
A growing range of products are available on single bank systems that connect corporates directly with one bank. These range from vanilla foreign exchange (FX), non-deliverable forwards and options to money market deposits and fixed income investments. Despite this, some mid-sized corporates are still resisting, concerned about cost, technical requirements and the risk to their existing bank relationships. However, the simple answer to this is that by not migrating they are putting themselves at a competitive disadvantage, particularly as the banks have worked to overcome such issues.
By automating online trading to a bank’s platform, mid-sized corporate clients can devote more time to their core business goals, while the bank’s dealers continue to provide business support through dealer intervention systems – credit extensions, dealer limits and rate confirmations can all be done online.
In fact, at any time during a trade from bid/offer to confirmation, the dealer is still available via online chat and, if necessary, by phone. All trade related administration – from executing high volume trades efficiently and swiftly, to maintaining an historical track record of all trades executed – is catered for through the single-bank portal. Additionally, e-trade logs can be exported into accounting packages, providing a complete and accurate audit trail on usage.
As banks continue to invest in their e-trading platforms, they will be forced to stretch further to differentiate, leading to a growth in asset classes and an increased sophistication of their structured product offerings.
Any trading platform should integrate foreign exchange and money market (deposit and loan) requirements into the daily operation of corporate businesses cutting trade-related administration, saving time and costs while providing access to competitive prices. In turn, this should reduce hedging and investment costs. Platforms should also allow the customer to manage their foreign exchange spot, forwards and swaps as well as trade money market deposits and loans quickly and securely. Moreover, they should cater for all trade related administration through e-trade logs, which can be exported into accounting packages, providing a complete and accurate audit trail on usage.
There are currently only a few platforms that offer both money market deposits and loans products for liquidity management plus automatic rollover of a deposit or loan at maturity. Other platforms will have little choice but to play catch-up to remain competitive and, as such, money market instruments are undoubtedly set to spread into more structured investment products, such as commodity, equity and currency linkers.
While the growth of e-executed asset classes will be driven by market demand, banks will continue to offer even more administrative services through their single bank platform. The ultimate objective is, of course, that a treasury management system will be fully integrated with an e-platform, allowing all regional treasuries to transfer their daily currency/money market requirements to a central hub where it will be lodged as one netted trade with the bank.
The net result should be more clients with more time to exploit their improved liquidity positions. And while an e-platform will never replace a conversation with a bank dealer, it will complement and strengthen the relationship, improving efficiency, speed of action and consistency.
1In 2007, Lloyds TSB analysed accounts held by 3,000 businesses with turnovers greater than £15m and discovered that one third of the respondents had enough spare funds to place in money market deposits, but failed to do so.