David Leigh
David Leigh

How are people changing their FX workflows to prepare for the next digital age?

Seamless, end-to-end trading efficiency from front-end execution to back-office processing has been a core objective of all FX market participants for many years. Direct connectivity between platforms and FX risk managers is now a reality, thanks to recent innovation in APIs and the broad adoption of connectivity standards. These in turn have enabled FX pricing and transactions to be embedded directly within client workflows - so that even simple processes, from making payments to settling invoices all the way to complex balance-sheet management, can have embedded FX capabilities. But will today’s plethora of established technology providers in the eFX workflow space - delivering services including confirmation matching, aggregation, compression, reconciliation and settlement - be replaced by APIs and other new digital technologies? As innovation continues, are we close to real-time cross-border FX payments? e-Forex spoke to David Leigh, global head of FX spot and electronic trading at Deutsche Bank, to find out what the future holds.

First Published: e-Forex Magazine 87 / SIBOS 2019 / July 2019

There are compelling reasons for the buyside to invest in improved FX workflow. “Both our institutional and our corporate clients are showing increased investment and interest in workflow solutions. On the institutional side, we have clients razor focused on maximising efficiency through the FX market. Some of that can be achieved through the automation of simple operational tasks - share-class hedging, for example, or rolling open positions to different value dates. On the corporate side, what we’re seeing is a huge push to automate and move away from manual processes,” says David Leigh.

Historically, corporates have tended to operate on a regional basis, with regional treasury centres operating multiple local banking relationships and interacting with each other on a bilateral or multilateral basis. Today’s trend is for corporates to use technology and workflow solutions as a means to centralise decision-making to head office. For both payments and receivables involving FX transactions, the cost-save is both immediate and significant. Leigh says: “The reconciliation process becomes much more cost-effective. If a rupee payment arrives locally, for example, giving head office visibility enables any hedge on the currency risk to be unwound immediately.”

Replacing tactics with strategies

Compliance can also benefit from improved FX workflow, given that new regulations typically require FX firms to capture additional information surrounding trade execution. What demand is there for incorporating due diligence into trading workflows? Leigh says: “There is huge demand. Whenever a new regulation comes in, often with a relatively tight timeline for the market, people tend to home in on tactical rather than strategic solutions. When timelines are tight, market participants are forced to come up with their own tactical solutions. There isn’t really time for the market to produce industry solutions.”

This is changing rapidly. “With the regulation of the past five years, people have started to look for more cost-effective and efficient responses,” says Leigh. In doing so, they are moving towards automation. The trend is towards industry-wide responses to change; Deutsche Bank itself is investing in scaling up its own “elegant solutions” from the specific business areas for which they were developed, towards a much wider use case. Leigh says: “If you’re a local bank, or indeed a relatively international bank, does it make sense for you to have built your own solution, and to support and maintain it over time, as regulations change? Or would you prefer to work with a partner bank and thus have a workflow that automatically embeds the reporting angle and ultimately lowers you cost of delivery to your end client?”

The capacity for trading firms to handle data, and thus their demand for it, continues to grow across FX
The capacity for trading firms to handle data, and thus their demand for it, continues to grow across FX

Communication is key

Not all questions are difficult. But as this suggests, automation is not an end point; it’s an enabler. Firms can be more effective, more responsive, altogether more agile. They can also hone their analysis and decision-making by processing richer, more granular data. Indeed, firms’ capacity to handle, and thus their demand for, data continues to grow across FX. But all this increased demand and consumption serves to highlight another issue. Many FX workflows involve a number of be legacy systems, which historically have not communicated directly with one another.

A corporate’s treasury-management system, for example, might output to a human who might make a trading decision that is then input into an execution system. Leigh says: “End to end, an FX workflow can involve seven or eight independent technology systems. Each of those systems will capture the data, but they don’t talk to each other. The opportunity in delivering a single end-to-end workflow solution is huge - it’s about getting all of that data captured in the right way across the whole stack.”

If we’re talking about system communication, we’re talking about APIs and we’re also talking about an issue that is market-wide as well as enterprise-specific. Citing SWIFT’s work on APIs, Leigh says: “With cross-border payments, you have regulatory regimes that expect banks to identify end-beneficiary and original sender, but you’re forcing that flow to go through independent banking systems in different countries that just don’t operate on a message format that can contain that information.” In practice, even now, ancillary messaging is required to carry the information required by regulators. Which means that without full end-to-end automation, without APIs - no, we’re not as close as we might have hoped to real-time cross border payments.

So what do we do? Leigh says: “Our systems are continually developing, regulations change, and technology innovation also occurs. Some work and upgrading is inevitable, but the way the market can help - and we’re doing this here at Deutsche Bank - is by working towards isolating our clients from the ongoing costs associated with upgrades, regulation changes, et cetera, by partnering with them to provide solutions that handle all that for them. We can provide scale by building the technology and having the maintenance teams in place.”

The point is at once simple and profound: clients are buying a service; they’re not buying a series of challenges that they then have to face for themselves. Leigh says: “Banking is challenging and difficult. There’s a lot of regulation, a lot of attention to detail and client use-cases are all different. Disruptors have come to market in the FX world, and some of them have offered elegant solutions to a part of the client’s workflow. But it’s much harder to provide a deep, bespoke solution across a whole set of client use cases. Ultimately, that is what we aim to achieve.”