eFX: Are You Making the Most of Your Banking Relationship?
Are corporate treasurers ready for the dynamic growth in the FX market? Treasurers operating in the FX space need to be able to access the best research, the latest online dealing tools and the available range of multiple provider platforms to participate in the FX markets on a leaner, more competitive basis. To ensure that they can leverage these developments and market best practices, corporate treasurers need to make certain that their banks are leveraging tools that will give them the support they need.
The need for added support in FX trading is becoming an area of urgency for corporate treasurers. Research published this year by London-based ClientKnowledge has found that daily volumes in the forex markets are currently around US$2.3 trillion, a third of which is corporate business. Of this corporate business, only about 50% is currently being transacted electronically.
Not surprisingly, overall volumes of corporate business are set to climb, driven by a variety of fundamental factors, including the continuing spread of globalisation which is pushing cross-border trading volumes ever higher. As a result, ClientKnowledge predicts daily volumes in the marketplace to reach US$3 trillion by 2010, with over 75% of corporate FX business transacted electronically.
This means that any corporate treasuries currently missing out on the competitive advantage offered by the most sophisticated dealing tools will pay an even higher price for slow adoption in the future. There are also regulatory drivers, such as the Markets in Financial Instruments Directive (MiFID) in Europe, which comes into effect in November 2007, placing an additional burden of transparency on market participants.
One of the main advantages the latest dealing platforms offer is that they provide access to a variety of marketplaces and these are primarily of two types. The first kind, such as FXall and Currenex, are relationship-based and form an alternative route to access a bank’s prices on a guaranteed basis. Others, such as Hotspot, can be accessed anonymously (providing the necessary broker relationship is in place) and so give the treasury an alternative source of liquidity.
The advantage of access to multiple markets is not simply one of sourcing the best prices. The development of end-user focused trading platforms has been an important factor in helping to re-balance the bank/treasury relationship to give the end-user more influence. This is especially the case in relationship-based markets, such as FXall, where end-users access prices that are client specific and thus their individual transaction flows are automatically more transparent to both parties – enabling the client to use the volumes it transacts as a tool to influence the relationship it has with its dealing banks.
In addition, because new technology is not hardware intensive and is easily deployed to customers, banks have grown more responsive to customer’s demands – for better prices and for added-value services. The failure to adopt automated processes thus leaves the bank’s client doubly disadvantaged; not only are these treasurers missing out on the most competitive tools, they are also missing out on the opportunity to leverage their relationship with their bank and become more demanding clients.
The combination of trading tools, the ability to access bank prices across multiple markets and the increased competition between banks for end-user business means this is a time for treasurers to re-assess their banking relationships and examine their trading processes to ensure they are getting the best return on their dealing activities.
Manual processes, which are prone to human error, are not responsive enough to exploit market opportunities that open up only when utilising automated trading programs. For example, order management tools integrated onto automated trading platforms allow stop-losses to be activated and profits taken automatically, which enables more sophisticated trading techniques over and above simple hedging. For the desk to be responsive enough to apply more active trading strategies, however, one-click trading using live, streaming prices are safer and reduce market risk when compared to request-for-quote. Further, in these circumstances, the need for timely, integrated research comes into its own so that the desk can see exactly what movements are already priced into the market.
Today’s trading platforms can deliver added visibility by offering the treasury a portfolio of tools that enables them to take proper control of their trading activities by picking and choosing the functionality they require. This may not always mean the most active or most sophisticated treasury operations: it may simply enable the desk to automate the smaller, more mundane transactions while experienced staff can concentrate their energies on more complex hedging positions.
It is not only the business’ treasury function that benefits from this functionality. There are also STP and compliance advantages in utilising automated trading platforms. By trading via electronic channels, STP can be increased so that transactions can be aggregated across the corporate structure on a pre- or post-trade basis, enabling easier post-trade settlement and accounting.
To ensure they are receiving the kind of service they require, treasurers need to reassess their relationship with their bank. The considerable apathy that characterises some treasury/bank relationships benefits one party only – the bank. Bank sales desks, by failing to distribute the most up-to-date trading platforms to its client’s desktops, save money while weakening their end-users’ position in the marketplace. Meanwhile, the end user is in no position to judge the service it is getting from its bank without these trading tools.
The nature of bank/corporate relationships is already changing. Where corporate treasurers once relied on strong personal relationships with their bank, today, bank sales desks are under pressure to perform. The kind of one-to-one relationship many large corporate customers once enjoyed with their bank is now under threat and the word-of-mouth flow of information to clients is being squeezed. Without research, analytics and ‘one-click’ trading at their fingertips, treasurers are missing out on advantages enjoyed by other end-users who are competing with them for the best prices.
At the same time, executable streaming prices, advanced research and analytics, and access to multiple markets all add to offering end-users a more realistic and holistic view of its market position and on where it stands in relation to other market participants. Thus, by delivering this information to client’s desktops, banks’ strengthen the end-user’s hand when negotiating the treasury/bank relationship.
In this respect, it is essential that treasurers review the service they are receiving from their bank in the knowledge that it is now possible for them to enjoy the same levels of trading information, execution and STP as their banking partners. If this is not the case for your own corporation, it is time to ask searching questions of your relationship manager, as well as to look at what other institutions are offering in terms of trading platforms, access to multiple markets and value-added services. Today’s treasurers are in a strong position in their relationship with their bank; the danger is that many may not realise it.