Swaps are a $4 trillion-a-day market, which hasn’t seen as much bank-friendly innovation as we have seen elsewhere in this industry. Why is that?
There are many factors that have contributed to this inertia, but possibly the biggest is economics. After the prolonged low interest rate era globally, constant spread compression, and higher capital requirements on swaps books, banks have long claimed that their margins on FX swaps are wafer thin, and often negative. So there has been little appetite amongst banks to pay for innovation in this market, as they would have to pay fees to use it. That attitude is now changing for several reasons.
Manual voice-based trading is anachronistic in a compliance-driven, operationally efficient world. The expansion of internalisation engines from Spot to Swaps has hit a wall due to the lack of a suitable primary market to exhaust risk. Technology costs have come down to the point where the economics can work.
What specific problems and issues were you setting out to solve and address with the launch of FXswapX?
Dealer economics have already been challenged from every direction, so our key emphasis has been on providing the best, information-leakage-free, inter-dealer matching platform possible – one that is consciously NOT trying to disrupt the market. The efficiency gains we bring will have a beneficial ripple effect on the whole ecosystem over time, without breaking it.
Specific concerns that we heard from banks included frustration that no successful innovation had occurred in nearly 30 years; that the lack of a good credit process has been a blocker; and that no trusted midrate exists for inter-dealer matching – in large part due to the way platforms have sought to monetise that data. Beyond that, they wanted a platform that was actually designed from the ground up for Swaps trading – not something adapted from an adjacent market. It’s hard to believe that simply didn’t exist – until now.
Many platforms try to serve every participant type simultaneously. What are the disadvantages of that approach and how does yours differ from it?
It’s a standard “jack-of-all-trades” problem. We’d rather be master of one.
What were some of the core considerations that influenced the design of your new platform?
Cost. FXswapX was born out of FastFin, whose core business is rapid, high-ROI innovation projects, mainly for banks, but also building independent platforms such as FX HedgePool. We have heard of firms spending upwards of $150 million trying to build a swaps platform and giving up. This is a market that needs low-cost, highly efficient technology, and that is exactly what we know how to do.
The second core issue is more about the business than the tech, and that is regulation. We have been very careful to structure our business in such a way that we can minimise the negative cost implications of regulation, while still operating very much like a regulated MTF and being FX Code compliant. This feeds through into lower costs for our users.
Please tell us a little about the key operational aspects of the FXswapX solution and how it works?
FXswapX is a mid-market matching service optimised for the largest market-making banks. We have a proprietary midrate construction methodology using bank feeds, running in a secure encrypted enclave.
We cannot see or sell bank data, nor can anyone see the midrate prior to matches occurring. We have a suite of sophisticated order types that control the matching process, and support a degree of market-making and taking activity within the broader mid-matching environment. One of our biggest operational challenges has been to design a platform where manual traders can happily co-exist with bank algo-driven electronic internalisers, and to do so without compromise.
What’s the standout innovation with FXswapX?
FX swaps are very interesting instruments, as their price construction is multi-dimensional, almost 3D in nature at times. I won’t expose our core secret sauce here, but the claim we can fully support is that we believe FXswapX to be the only platform that correctly calculates matches based on the 3D nature of the market. All other platforms, we would argue, are essentially re-purposed from Spot, and haven’t focused on the core differences, choosing to insert unhealthy workarounds instead, which then results in unwelcome trading outcomes.
How have you gone about making the onboarding and integration processes as simple and seamless as possible?
We have made sure that we plug into existing bank APIs and workflows. Innovation nearly always causes you to try to break the mould and do something new – we ARE doing that, but not in a way that requires any changes to processes within banks. Even then, onboarding can be painfully slow, so we foster the right partnerships to clear roadblocks when they occur.
How important is user feedback going to be in helping you to refine the FXswapX solution and what’s the easiest way for people to learn more about it?
Critically important. As well as gaining feedback from every client interaction, we have a Bank Working Group of eight banks who have been enormously helpful in affirming and shaping our ideas. We are genuinely solving this problem in partnership with the banks, and taking our time to do it right. Reach out to us at info@fxswapx.com for more.