It’s not an understatement to say that the foreign exchange (FX) industry has had to fundamentally rethink its definition of, and approach to, business continuity planning (BCP) and disaster recovery (DR) over the course of the last year. While the same is certainly true for other asset classes, FX markets are of critical importance to the real economy, a fact highlighted by the Covid-19 pandemic. FX is also an asset class of strategic importance to IPC, due to its sheer size and the corresponding scale of our clients’ FX activities. This is evidenced by the most recent BIS 2019 Triennial Survey, which continues to show exponential market growth - April 2019 estimated trading in the FX markets was $6.6 trillion per day, up from $5.1 trillion three years earlier, and has only grown since then.
The FX markets have enjoyed a notably quiet decade since the global financial crisis, in terms of volatility. The advent of the global Covid-19 pandemic completely upended this period of relative calm, exacerbated by the new logistical challenges of trading in a lockdown, accessing accurate market information and finding liquidity in all required currencies during a period of intense upheaval and market uncertainty. As a result, the early days of the pandemic saw FX markets plunged into a maelstrom of unprecedented volatility. This level of activity brings challenges as well as opportunities, since FX markets continue to be more competitive than ever.
An asset class with unique challenges
Taken together, the above factors drive a need for enhanced resilience in the FX trading community. The pandemic has undoubtedly altered most firms’ understanding of DR and BCP –even for those outside the financial services industry. Many of IPC’s clients had to quickly pivot from focussing on the need for DR sites to supporting home-working arrangements for their employees. From our perspective, the biggest shift in business continuity for customers has been towards making sure that employees can stay connected, wherever they may be.
For FX trading firms, the nature of the asset class and its market structure poses unique challenges. As we’ve seen, FX is generally considered to be a highly liquid asset class with significant electronic trading volumes. However, it’s also a very diverse asset class, with different considerations for different parts of the class.
Non-deliverable currency pairs, less liquid pairs and FX options, for example, may be traded on venues and platforms, but require a higher degree of intervention from sales and trading personnel in pricing and execution. FX market participants are also a notably diverse ecosystem, consisting not only of financial institutions on the buy and sell sides, but also real economy end-users such as corporates, and payment service providers and their own retail clients. There is also still a significant volume of voice trading across the FX market.
Resilience has many meanings
Electronic trading has been, to a large degree, relatively easy to handle from a business resilience perspective over the past year, particularly in the case of automated and algo-driven trading, which accounts for a majority of FX volumes. Existing BCP / DR plans and processes are fundamentally designed to address the problem of failure at a primary site. In most cases, there hasn’t been any failure at the primary site – meaning that electronic trading has essentially continued as is.
For voice trading, on the other hand, the situation has been rather different. Centralised DR sites are relatively well understood and easy to maintain, typically spread across a select few strategically chosen sites. Home working adds new complexities, and involves keeping hundreds or thousands of individuals connected in a safe, secure and compliant manner.
There has also been a need to ensure that the latency introduced by trades requiring manual pricing on venues is not exacerbated by a change in the location of the trader. In some cases, the latter has proved to be an intractable problem, with the only option being for FX traders to be physically located on a trading floor.
A new paradigm in business continuity and disaster recovery
It has become clear that we’ve now shifted to a new paradigm in business continuity and disaster recovery, one in which merely having a business continuity plan and a DR site in itself is insufficient. Firms must now think more generally about resilience and consider the new technologies and services that they may need in order to support new forms of organisational resilience.
Given their diversity, FX trading firms in particular vary greatly in their size and in the sophistication of their infrastructure and operations. While there is certainly no one-size-fits-all approach, the resilience challenges faced by FX firms have a great deal of commonality: the ability to trade from a home-working environment while continuing to service clients in a secure and compliant manner, and access markets and liquidity.
This shift in attitude towards business continuity and resilience has been very challenging for many firms. Larger financial institutions initially struggled given their highly centralised, condensed sales and trading operations and lack of flexibility in working arrangements for these functions (driven in large part by regulatory compliance requirements).
On the whole, however, once solutions were identified and decisions were made, these large firms had the resources and infrastructure to procure and implement them rapidly and at scale. Many buyside firms on the other hand have found it more difficult to scale up quickly and to support the uptick in connectivity requirements.
Old and new solutions
So how has the FX industry solved the problem of shifting the trading floor to a series of living rooms and spare bedrooms? In practice, it’s been through a combination of old and new technologies, sometimes used in previously unanticipated ways.
We’ve seen a huge shift to usage of virtual turrets (also known as soft clients) – this is software that mimics voice workflows on home PCs and mobile phones that would normally be experienced on traditional turrets on the trading floor. IPC had a legacy product, Omni, which suddenly and unexpectedly exploded in popularity to support soft turrets, and a number of our customers started using this software on a large scale.
SD-WAN (Software Defined Networking in a Wide Area Network) has been another popular choice which ticks a lot of boxes for clients looking for a solution that offers both security and flexibility, allowing for arrangements to be adapted as employees move between locations, or gradually shift back to offices over the course of a return to “normality”. SD-WAN combines several technologies to create secure networks with flexible connectivity options and simplified administration and troubleshooting. SD-WAN uses internet connectivity, so it can reach anywhere that an internet connection can, and it also interacts with multiple devices (e.g. mobile phones, tablets and PCs, all on a home Wi-Fi network).
We’ve seen a lot of growth in the SD-WAN space and BCP is certainly a key area in which using IPC’s Connexus® SD-WAN can build in extra resilience and flexibility. While dedicated disaster recovery sites aren’t going away in the long term, we believe that the need for fully diverse carrier connectivity to those sites might lessen. Furthermore, wide-reaching geographic requirements will make reliable and diverse connectivity more of a challenge. In this context, having the ability to scale DR sites up or down on the fly as needs and plans change can be a real differentiator for FX firms, in cost as well as strategy.
What does the new business resilience look like?
The new business resilience paradigm is, in our view, a more holistic one. It takes into account not only the technological and infrastructural aspects of disaster recovery and business continuity, but also the wider questions of market resilience and access to liquidity. Historically, business continuity was all about being able to failover successfully to back-up systems, shift operations to secondary DR sites, and continue accessing the market as normal (albeit with other market participants in the same situation). Now, it’s about ensuring that the contingency measures in place provide the robustness and flexibility required to cope with whatever type of event is next thrown our way.
What does this mean for FX trading firms? We’re seeing activity that indicates firms are starting to reassess their trading strategies and sources of liquidity. Our clients are beginning to consider how they can increase their resilience when it comes to liquidity, by bringing on new exchanges from different jurisdictions, and expanding their liquidity footprints. It’s not just about exchanges and venues, but also single-dealer platforms, and direct access to brokers and market makers where possible – diversification is key to building that liquidity footprint and the resilience that it brings.
It can take weeks or even months to complete legal and technology on-boarding to a venue or liquidity provider, so having that connectivity in place upfront is really important. Access to market data is also vital – in periods of great uncertainty, when markets are volatile and liquidity is drying up, it’s absolutely critical for FX trading firms to understand where the liquidity is and then to have the means to access it, either directly or indirectly.
Building resilience through strong and connected communities
For firms that are highly dependent on a small group of venues and counterparties for market access, this could create significant challenges. But for those with access to a strong, diverse community, this is an opportunity to shine, to demonstrate real differentiation from competitors.
In our view, access to a successful community network – one that offers its participants connectivity to an already built, diverse and global financial ecosystem – is key to building greater market resilience. This community should include a wide variety of counterparties for price discovery, liquidity and execution, such as broker/dealers, inter-dealer brokers, exchanges, other trading venues, dark pools, hedge funds, pension and mutual funds, institutional investors, trade lifecycle services and market data providers. In other words, the information that firms need to find liquidity, and the ability to access it.
Resilience also means having the capacity and capability to evolve when it comes to supporting the business models of the future. As the market evolves, new participants can benefit from simplified access to a community that can support their business. Consider the emerging digital assets and cryptocurrency sector. It’s a new market, yet one which still relies on fundamentals: access to investors, liquidity and data. Without access to an open community - one in which innovators and traditional market participants can easily find and connect to one another - new entrants will find it overwhelmingly difficult to establish themselves.
It’s a very different way of thinking about business continuity planning – but one which we firmly believe will enable firms to go beyond mere survival and to thrive in whatever conditions they find themselves in.