The fintechs operating in this space have adopted a variety of approaches. Some are focused on the digital experience, while others have established themselves as ‘second generation’ providers, using interoperable technologies to enable firms to bridge the gap between legacy infrastructure, their need to operate in real-time right now and building systems to support future connectivity and business requirements.
“As trade volumes have increased, we have seen a widening gap in terms of what legacy systems can do,” says Arjun Jayaram, founder & CEO of Baton Systems. “When we add T+1 and tokenised assets into the mix, it is clear that we are in a transition phase.”
Increased transparency is often referred to as a key benefit of fintechs operating in the post trade FX space, but Jayaram says this is just part of the answer.
“You need transparency of trades and liquidity where firms can have a real-time view of their assets starting from when the trade or an obligation originates, as that asset moves, right to the point where they have assets in their bank accounts and reconciled with their books and records,” he says. “You also need what we refer to as collaborative workflows. These are automated, programmable distributed workflows governed by pre-agreed rules, alerts and controls.”
Regulatory requirement
There is considerable interest in the extent to which fintechs can help FX market participants with their regulatory compliance, so it is essential that fintechs understand where they sit in the process and how this is impacted by the regulatory spectrum. There is also a role for new technology in helping to improve risk management.
Baton Systems believes blockchain and DLT have a significant role to play in streamlining post trade processes. However, this does not mean it is the answer to every challenge. “I would go so far as to say that blockchain is the wrong solution for some problems, for example where there is a centralised venue and you need access to data,” says Jayaram.
“However, in situations where you need shared data or a shared view of the data and there is a collaborative workflow, a distributed ledger is of great value. For things like liquidity and netting in FX, collateral management or cashflow management there are definitely benefits.”
Fintech influence
There has been a significant amount of change in the market that doesn’t show signs of slowing and everyone is feeling cost, resource and roadmap challenges. Fintechs can help supplement legacy technology and bridge the gap for quicker and often more cost-efficient adoption of needed changes.
That is the view of Louisa Kwok, head of TradeNeXus, part of State Street’s GlobalLINK suite of electronic trading solutions, who adds that by participating in a vendor solution with an existing ecosystem, clients can benefit from the know-how of other participants.
“TradeNeXus has over 20 years of experience servicing 400+ global asset managers and their counterparts. We leverage our client base in garnering a wide view of challenges to create value-add solutions that can flex to suit varying client needs. We continually look at ways to innovate with an eye on client adoption impact. TradeNeXus is a part of State Street’s LINK platform which is an interoperable workspace that brings together execution venues with our post trade solution to provide lifecycle transparency.”
New technology based on front-end interoperability such as FDC3 (Financial Desktop Connectivity and Collaboration Consortium) standards can bring together applications that historically sit in silos into one single desktop environment. This can not only increase transparency, but also allow data to be shared between the applications on the front-end, creating a new paradigm for data sharing between applications without API integrations.
In the FX world, transparency should only exist between parties to a trade, or a group of trades shared with regulatory bodies by the trade originators and permitted to those trade parties.
Fintechs can enhance this transparency by providing real-time visibility into each stage of the post trade process, allowing secure sharing of data between trade participants and regulators and leveraging advanced analytics to provide the counterparties with a clear view of the entire process.
Standards drive
“New technologies drive the creation of common data standards, which are essential to creating lasting change in the industry and for meeting regulatory requirements,” explains Andy Coyne, founder of CobaltFX. “More harmonised standards will allow institutions to leverage shared infrastructure, reducing the complexity of complying with fragmented regulations.”
Coyne acknowledges that DLT brings benefits such as immutability and enhanced security but notes that there are issues around speed, interoperability between chains, cost and KYC.
“It is important to differentiate between layer 1 and layer 2 technologies as they have different cost and time priorities,” he says. “In the FX market, layer 1 refers to the blockchain infrastructure which is typically used for the final state of transactions rather than for risk management. External layers need to be real-time, inexpensive and secure to address the broader industry challenges beyond transaction finality.”
As for future developments, Jayaram refers to a number of potential catalysts for change including the high interest rate environment and faster settlement.
Settlement challenge
“We are seeing big market structure changes with new treasury clearing rules coming in and the move to T+1 that are likely to shape the industry,” he says. “The next step is real-time settlement 24/7, where intraday liquidity becomes an issue because of the shortened cycle. Then there are light tailwinds such as emerging tokenised money market vehicles, although these are nice-to-have rather than something likely to warrant major change across the industry.”
Kwok observes that post trade processes and data will no longer sit in silos. Regulations like UMR have brought front office and operations closer together and there will be greater demand to have a holistic view of the trade from order creation to settlement to address structural changes in the industry and the definition of best execution. “This means the need for data – and breaking the silos between systems – will continue to grow,” she adds.
Coyne anticipates increased profit opportunities as fintechs enable full credit optimisation, preventing over-allocation and ensuring accurate limit-up scenarios.
“With streamlined credit deployment, trades will no longer be missed due to the slow and archaic means by which credit is deployed,” he says. “Additionally, there will be wider acceptance of shared technical infrastructure for aspects of trade management that do not represent a profit-making opportunity.”