By removing barriers to exchange, standards always increase the amount of business done. They cut costs, widen margins, expand opportunities and reduce risk. Standards lower the cost of doing business, increase returns on investment and reduce the risk of something going wrong. And it is hard to think of a market where standards can deliver more of these benefits than foreign exchange (FX). Unfortunately, standards are not seen as the province of senior management in FX, even in operations. Instead, they are regarded as technical adjustments to business processes, best left to software engineers. This means their contribution to lifting the commercial and financial performance of participants in the FX markets is consistently under-estimated.
For now, existing message standards work well for the FX industry. They are driving the high levels of automation it is achieving today. In fact, the volume of business the FX industry transacts would be impossible without standardisation. Standards are also adapting successfully to keep pace with commercial, operational and regulatory changes affecting the FX markets.
Yet it would be a mistake for the FX industry to be complacent. The scope to lift operational, commercial and financial performance further and higher, through more and better use of standards, remains immense. A series of mandatory steps taken by SWIFT Standards Releases have proved it is possible for FX market participants to capture an ever-growing proportion of that potential value. None of the obstacles to capturing all of it is insuperable.
e-Forex asked Joe Halberstadt, Head of FX and Derivatives Markets at SWIFT for his views about what needs to be done to achieve better use and further enhancement of standards in FX.
Joe, what do you see as the key benefits of Standards and the role they can play in the FX market?
The aim is to move from manual processing to more and more automation. Standards allow people to communicate in a common language. The better defined a message is, the better a computer can process it. FX markets are very high-volume OTC markets. There’s still quite a lot of voice trading as well as electronic trading, and ultimately, the back offices in all the banks and other FX organisations have to settle all their trades The better the trade-confirmation process can be structured and formatted, the more likely it is that both parties can reach agreement on what was traded and proceed to settlement in an unambiguous manner.
With high-volume instruments, we need to get STP rates up to the 99.9% level. There are also lower-volume instruments, not so many of them but they’re more complex, and the more you can standardise those, the more readily people will move to settlement.
In what ways could exiting message standards in FX be further improved and added to?
The standards that are used in post-trade confirmation and settlement in FX have evolved over many years. The original standards were developed in an era before there was a huge amount of automated STP, and therefore, there has always been some scope in them for free-format text and human-readable settlement information. The more we can reduce that, the more we can structure it, the more we can encourage participants to use structured data – the more automated and risk-free the whole process will be.
Also, the question arises: where are there still manual processes today, and how can we help eliminate those manual processes? There are processes that are, say, 98% automated, but 2%, perhaps 5% of the time, you end up with manual processing. If you’re doing 100,000 trades a day, that’s significant. Manual intervention is always risky.
Adjustments to message standards are an important means for achieving higher rates of automation in the post-trade FX environment. What obstacles are proving harder to clear than others in achieving this?
The big obstacle is always the cost of change. To get to somewhere better always requires some pain. Banks and others are under huge cost pressure; there’s a huge amount of change going on; therefore, the business case for something new has to promise quick and efficient delivery. It can be hard work to get to a better place. Also, it’s all very well me making the case for change, but if my counterparties aren’t going to do it, there’s no network effect between us. Change like this needs a network effect.
What role is SWIFT playing to facilitate further enhancement to Standards in FX and how is it engaging with the industry as part of this process?
We work very closely with our customers and industry bodies to understand where there are still bottlenecks, where there are still manual processes, and to see how we can help deliver improvements. We seek constantly to push the boundaries further out in terms of increasing automation. As the White Paper shows, we have made quite a number of changes over the last few years, and potentially more will be coming. We are looking to link our FX business to the gpi business, because ultimately all trades are settled through a payment. If we can improve the transparency and the visibility of settlement, that could be a big win for the industry.