Peer Joost and Stephan von Massenbach

Cloud Applications – Driving change in the FX Market

September 2022 in Fintech & Connectivity

Over the last two years we have seen a market-wide shift in terms of FX trading firms being more open to adopting cloud technology and Capital Markets FinTechs increasingly deploying applications in the cloud. We asked Peer Joost, CEO and Stephan von Massenbach, CRO at DIGITEC to give us their own perspectives on these developments.

Why are we seeing more FX applications delivered via the cloud?

PJ: Attitudes towards the cloud have changed since the onset of Covid. Those firms (and regulators) that previously didn’t buy into cloud technologies, citing security and latency as barriers to adoption, saw the FX market continue to operate efficiently during Covid, even with staff working remotely during periods of extreme market volatility. During this time the cloud passed the test.

In 2022 we continue to see more financial firms announcing cloud adoption for significant parts of their businesses. Use of the cloud, whether in a dedicated set-up or as a multi-tenant implementation with shared infrastructure enables technology firms to deliver against different client requirements and improve accessibility.  

What are the main benefits?

SvM: Implementing a new system at a bank is generally regarded as a big and resource-heavy project. An on-premise system requires expensive hardware, IT overheads and ongoing maintenance resources. Even large firms are slowed down by this and it is quite common for an internal implementation of a third-party system interfacing to other systems to take 1.5 years. For smaller firms, with fewer resources, the burden is even greater. For any size of firm, while the cost of enterprise-level software is high, adding internal implementation costs makes projects exceed most budgets.

Cloud computing has many benefits compared to on-premise deployments. Firstly, a client can acquire a system with no IT overheads, no ongoing maintenance, and no hardware costs. In addition, the costs are usually substantially lower. Secondly, cloud computing enables FinTechs to offer truly scalable solutions and to create new solutions derived from larger systems that are leaner and better tailored to the needs of a small trading team. For DIGITEC, we began deploying our D3 pricing engine in the cloud in 2020 and since that time the vast majority of new clients have connected to the hosted service.

What role will the cloud play in the development of the FX Swaps market?

PJ: Clearly, the FX Swaps market is at an inflection point, with many firms deploying technology to fuel the electronification of this market. For this to become a reality, high speed connectivity, transparency, and automation are needed. Here, cloud technology plays a huge role in delivering the interconnectivity of systems.

Why has DIGITEC adopted cloud deployment?

SvM: As FX Swap and NDF volumes continue to grow around the world (driven by advances in technology and the increased adoption of electronic trading) we are seeing an increased demand from all sizes of market participants looking to automate and enhance their market making capabilities. Previously smaller banks could not justify the investment in on-premise technology, and many used Excel to price FX Swaps. The recent adoption of applications deployed on the cloud makes our D3 multi-asset pricing engine more affordable and accessible for an increased number of firms, helping them to move away from a reliance on Excel, which most firms acknowledge is not a robust solution. Offering our own cloud solutions enables us to support and consult with our clients on a whole new level. In close cooperation with clients, we can easily analyse their setups and data in real time through the cloud, which is crucial for getting the maximum out of their pricing models in a powerful system like D3.

In addition to offering your D3 pricing engine via the cloud you have also just launched D3 Lite. Can you tell us about this service?

PJ: Delivering services via the cloud make them more accessible to the market, and smaller participants can now access solutions historically only available for the top global firms. Our plug-and-play D3 Lite FX pricing service, derived from the enterprise-level D3 Multi-Asset Pricing Engine, is a great example of this. D3 Lite is delivered as a subscription-based service with no hardware requirements or IT maintenance overheads. Our first clients have already been onboarded with a go-live time of only a few weeks. Launched to address the growing needs of smaller banks and Asset Managers, D3 Lite enables them to price FX Swaps and Forwards, providing key functionality in an intuitive web-based GUI, with auditing functionality. Our DIGITEC/360T Swaps Data Feed (SDF) provides the market data required for clients to build fully automated and accurate real-time curves.

How does increased cloud-adoption impact FinTechs?

SvM: While cloud computing offers an opportunity for technology vendors to provide a scalable service efficiently, it also means that there is a lot of work to do. Firstly, systems need to be redesigned and reconstructed in a way that they are cloud-compatible and able to offer multi-tenant setups, meaning that several clients can share servers and infrastructure while keeping data and information separate. Also, changing from providing a client with software code that they run, to hosting a system and offering the software as a service puts additional regulatory requirements on technology companies. Cloud adoption is a significant resource and cost investment, but for DIGITEC it is important to stay ahead of the market and to offer best-in-class solutions to our clients.

Looking forward, what do you see as the next steps for the cloud?

PJ: With access to cloud-based FX applications an increased number of smaller firms will be able to efficiently make more accurate prices to their clients. As more firms enter and participate in the FX Swaps and NDF market we expect to see increased trading volumes and an acceleration towards an electronically traded landscape. As NDFs and FX Swaps continue to grow as a source of global funding, the need for better infrastructure will become increasingly important. This will drive further cloud adoption and the development of industry-dedicated clouds which can be built as collaborative efforts based on shared best practices. They can be highly customised to provide firms with a menu of available services from which to build their technology, making sourcing, implementation, and integration processes much easier to manage.