Dan Barnes
Dan Barnes

Future proofing your business needs - Why the cloud is set to play a more central role in FX

Dan Barnes investigates how foreign exchange trading and infrastructure is being transformed through smart application of cloud services.

First Published: e-Forex Magazine 84 / Networks, Hosting and Connectivity / January 2019

In June 2018, Ravi Menon, the managing director of the Monetary Authority of Singapore, speaking in San Francisco at the Symposium on Asian Banking and Finance, noted that cloud computing has “considerably enhanced risk management” within financial services. “Risk assessments are now more comprehensive, more granular, and more real-time,” he said. “But the cloud has also introduced new risks. The risks are not so much in the technology of cloud computing per se but in the business and operating models of cloud services. Cloud services are essentially a utility provided by specialist third-party providers. And as with any third-party service provider, there are outsourcing risks associated with these cloud service providers (CSPs).”

Market research firm Vanson Bourne found in a 2017 study that IT spend, IT maintenance and operational costs all fell by more than 15% at firms that are adopting cloud versus those that are not, whilst also experiencing increases in process efficiency (18.8%), company growth (19.63%) and average time to market (20.66%).

Guillaume Spay

Guillaume Spay

“This is all about the safety of the system and when and how users can trade; we can update it when needed, so it is a continuous environment,”

For firms in the foreign exchange space, managing the risks of working with CSPs can help them to reap some of these advantages and more, argue several of the industry’s big players. Cloud can be used in a range of service offerings across the FX space and major financial technology (fintech) or service providers are taking advantage of the characteristics that cloud deployment provides to help their customers become more efficient, or even gain access to services that were otherwise prohibitively complex or costly. 

“The first wave of technological evolution in FX was the electronification of the market, with interbank platforms developing, facilitating the way banks were trading together,” says Guillaume Spay, Global Solution Director, Treasury and Capital Markets, Finastra . “The second wave that started when the crisis ended in 2010 was for platform economy. Responding to that, we assisted in the cloudification of the FX world, which meant that clients wanted more, faster and better service.” 

Talking about the stack 

Menon’s point focused on the impact of outsourcing. Although he noted these operating models are where risks lie, outsourcing also provides a key advantage. Through the mutualisation of resources with a single provider, market participants can quickly and easily engage with a service that might otherwise have been beyond the firm’s resources. That has turned peoples’ perspectives toward cloud-based services says Paul McTigue, Head of North American Sales, at CloudMargin, which offers a cloud-based collateral and margin management service.

Paul McTigue

Paul McTigue

“Only five years ago people were questioning use of the cloud, and now firms not on the cloud are viewed as antiquated,”

“Only five years ago people were questioning use of the cloud, and now firms not on the cloud are viewed as antiquated,” he says. “In 25 years of Fintech I’ve not seen anything move from a source of fear to being mainstream so quickly. The first wave was firms moving existing technology onto the cloud; the second wave is writing those applications on the cloud itself. We are one of the only solutions born in the cloud.”

In both waves of migration, trading firms and service providers need to assess how their systems can be built effectively to make them cloud-based without being held back by the design that existed for on-premise systems.
“If an app is moved onto Amazon Web Service (AWS) for example, it cannot always take advantage of Amazon’s natural scalability because of its non-native architecture,” says McTigue. “Eventually, someone will rewrite that. What we were able to do at CloudMargin is leverage the solution by sitting it on top of operating systems already existing in the cloud.”

He notes that the IT stack that firms are often running is purely technology, rather than finance specific technology, and that banks or asset managers ought to be writing code on top of that rather than running it all themselves. 

“It isn’t just an efficiency for banks to get off the hardware, it is really also that software stack that sits between the actual functionality that people need and everything they need to run in order to get to a development and production environment,” he argues. “That way we can just build what we need to build to help our clients, without building them the underlying technology stack. By contrast, if you build internally you have to gather that tech stack.”

Patrick Philpot

Patrick Philpott

“All of that trade matching, conduit to clearing, lifecycle management and trade reporting is now in the cloud for cleared FX services, focused on NDFs and increasingly options...”

Delivering better performance

Businesses like Finastra and IHS Markit, both service and technology giants in the Fintech space, have been leveraging cloud-based services to help firms grow and evolve from the front to the back office.

Within the FX space, IHS Markit supports ‘centralised services’ and ‘enterprise FX services’. Its centralised services are platforms that it has built along similar lines to operations in other derivative asset classes, where it acts as the matching service and gateway to multiple clearers.

Patrick Philpott a director at IHS Markit, says, “Within FX, since the Dodd Frank rules started kicking in, we built out broker affirmation as a platform, particularly around affirmation of options and non-deliverable forwards (NDFs) specifically for brokers who were registering as swap execution facilities (SEFs).”

Cloud can be used in a range of service offerings across the FX space
Cloud can be used in a range of service offerings across the FX space

Its well-established NDF clearing business processes 110,000 cleared NDF trades a month on average, and the firm also offers regulatory reporting piece and affirmation of voice broker trades.

“We are also starting to see FX options clearing pick up, although the volume isn’t there yet because it is brand new,” says Philpott.

In September 2018, IHS Markit launched a cloud-based technology platform called TradeSERV for FX, which virtualised these services. 

“All of that trade matching, conduit to clearing, lifecycle management and trade reporting is now in the cloud for cleared FX services, focused on NDFs and increasingly options, says Philpott. “It has three key client benefits. First is better access to data. Second is easier integration. Third and most significantly, cloud helps us take a monolithic software architecture that we used to have and modernise that to create a platform-as-a-service built in a real modular way.”

To achieve this the firm built a micro-service architecture, breaking down every function effectively into an ‘app’, which can be chained together to build a service. 

“If you need to add a new clearing house for an example, you are only editing the clearing app or adding another app for that clearing house,” he explains. “Rather than updating millions of lines of code you just update a specific portion of the modular code to introduce that new functionality. That makes us much nimbler and faster to market with new services.”

Finastra offers Seamless FX, a turnkey hosted FX end-to-end matching platform for FX products which allows trading of spot, NDFs, FX swaps outright. The firm has integrated it with its Fusion Treasury Solution. 

“That means for our clients we can cover the entire breadth of what is needed for FX,” says Spay. “We can source liquidity, we can manage liquidity, distribute liquidity and look at the risk integrated all together to make sure that the STP workflow is complete from A to Z.”

Access to cloud services is helping firms to break down silos beyond the technology stacks
Access to cloud services is helping firms to break down silos beyond the technology stacks

He observes that as a hosted solution it is easy to deploy, helping firms gain access to the platform with a low time-to-market. Spay reports it takes approximately three months or less to roll out, or more if complex integration is needed. 

“This is all about the safety of the system and when and how users can trade; we can update it when needed, so it is a continuous environment,” he says. “For cloud systems that is typically zero downtime, with full scalability of the system and infrastructure. The FX market demands very intensive use reliability, and in terms of performance management it is asking quite a lot. We use very high performing hardware and very elastic cloud capacity.” 

Tim Carmody

Tim Carmody

“The real value that FX trading firms get is the capability for collaboration, the ability to use multiple partners for executing trades or analysing data.”

Ready-built communities

Cloud also creates a meeting place for communities that is particularly useful in the forex space which has a very distributed structure. The way this works varies according to supplier and customer demand. 

Tim Carmody, VP of Network Services Engineering at IPC Systems, which provides FX Hub, a connectivity platform, says, “The real value that FX trading firms get is the capability for collaboration, the ability to use multiple partners for executing trades or analysing data. We’re seeing a lot of need for people to interconnect between their partnerships on private connections in order to build those environments. That allows them to get the best of breed for all the providers and the on-demand services and the value that the cloud brings along with levels of quality and performance guarantees that you associate with that.”

FX Hub caters for the trading centres, bringing together a combined environment that provides an ultra-low latency connectivity model between those centres with the ability to host equipment and provide local cross connects and interconnects between FX providers within the same facility. 

“Coupled with that we have the Connexus cloud environment,” Carmody adds. “We have access to 550+ cloud providers and we do a lot of cloud connect private network connections in that space. So, if someone to moving FX trading into the cloud and they want to start modelling how that looks, having a private network with secure service level agreements with a broad network would benefit the customer base.”

Cloud also creates a meeting place for communities that is particularly useful in FX
Cloud also creates a meeting place for communities that is particularly useful in FX

Finastra offers FusionFabric.cloud, which it launched at the beginning of 2018. This provides a platform, similar to an app store for financial institutions. It contains three units: one unit where users can create any application on top of Finastra’s core products; a second unit where the firm helps deploy those applications for the community; and the third is Fusion Store which helps to monetise application builders.

McTigue believes that access to cloud services is helping firms to break down silos beyond the technology stacks. “Once you are in the cloud you can change the way you interact with counterparties, and with other players in the market,” he says. “Then you start to look at things that would be hard to do with walls up, for example, between a bank and a hedge fund. We can take something discrete like collateral data, and expose those pieces to the cloud necessary to facilitate client transactions. If those can be exposed, to a bank’s client as well as to the bank there are services that that can be offered which were impossible in an environment where that was gated.”

Potentially he sees firms sharing data in a controlled way more effectively, for example, by having one trade file between two counterparties. 

“If that exists I don’t have to reconcile the two files each firm has,” he says. “All sorts of data that previously had to be reconciled can now be efficiently shared. If you have a community of users on a shared platform who are willing to share data then we are evolving, moving away from the back and forth of sending files.”

Historically a dynamic existed, where data moved into the cloud still had to be normalised in a database - even work in real time had to be persisted in the firms cache to be used in its analytics. 

“What we’re seeing is over time these would become a service oriented architecture, where different pieces like a calculator could sit in the cloud and just be called for certain tasks. For example, it could take prices from Bloomberg and a calculation from CloudMargin, and give you an output of the best trade to do, or the best bid / offer you want to provide, depending upon liquidity.”

The right build

For all that is on offer, FX trading firms need to ensure a given technology offering is right for them. Automation in forex is only going to increase, and that is likely to create pressure upon firms in their capacity to manage large volumes of data, to connect with service on demand, and to reach counterparties around the world. 

“There was a study by JP Morgan, noting that 70% of the FX market is automated and it can still grow up to 90% in the next two years,” says Spay. “Emerging markets will see that growth twice as fast as G10 currencies. That is why we believe there is room for a platform that is easy to handle and implement, fully integrated with a strong core treasury system.”

Carmody says, “Modelling of risk and trading strategies is an obvious use case for how FX traders could use cloud, and in that model, you wind up with a good use case for hybrid cloud, where you have some public cloud or private doing the storage for data and then execution taking the output of that into the FX trading centres whilst still having those performance guarantees.”

There are also solutions that can simply break down walls to business that is otherwise unattainable. Smaller banks are increasingly finding services available that open new doors. Philpot notes that in 2018, IHS Markit identified an underserved market segment on the trading and price distribution side of its business. While it is typically very commoditised, and was originally built for large sell-sides, a lot of the regional banks trading FX often abandoned IT build projects and had to look at buying as an alternative. 

“We are part of that competitive landscape,” he says. “Where client’s need to process a foreign currency payment through a bank, and the bank has not gone into that trading as an asset class for alpha, they have a large cost on payment processing. In the US those banks will use a correspondent bank, and they charge around 20bps to the price of an FX deal. That is a massive spread. If we can offer a price saving in the payment processing as well as automating the price request/response, credit check, positions management etc, then we have mitigated their risk, we have automated what they are doing, we have allowed them to scale and now we can save them some money on the payment piece.”

McTigue says CloudMargin has also seen an uptick in firms who do not have the scale to demand a purpose built in-house system, but can increase the value of their services through efficiency and by adding services through cloud providers. 

“Buy-side firm and some regional banks are looking at their customers’ margin requirements, where customers are big enough, and moving away from the manual processing of collateral,” he says. “The cloud generally allows efficiency in processing where firms had seen processing as a barrier to entry into certain types of business. That means the cloud is allowing firms to expand and grow.”