Stephan von Massenbach

FX Swaps: The only constant is change

November 2023 in Partner Content

e-Forex speaks with Stephan von Massenbach, Chief Revenue Officer at DIGITEC, about the numerous changes that are taking place in the FX Swaps market. Stephan talks about the increasing client demand for electronic Swaps prices, trader workflow automation, implementing advanced technology to deliver accuracy and speed, making technology available to regional banks using SaaS, and the growth of the interbank market.

How is the FX Swaps market evolving?

The latest BIS Triennial survey showed that FX Swaps accounted for $3.8 trillion per day in April 2022. (See chart on facing page). Traditionally, repos and money markets were seen as important instruments for firms looking to roll, hedge, or fund their positions. Over the past few years, there has been a sustained move towards FX Swaps fulfilling this need as a source of global funding.

Additionally, the rise in interest rates and longer-term yields has amplified this move and contributed towards increasing volumes in FX Swaps, as far-side clients have sought to hedge FX exposures.
As the FX Swaps market has grown, clients have increasingly demanded that their relationship banks provide liquidity across multiple currencies and tenors. When the market was smaller, banks used to price FX Swaps manually or use Excel, but the increased volume of FX Swaps has led to more electronic trading and an interest in more efficient and scalable technology solutions.

What is the impact of automation?

The FX Swaps market is now at a point where the majority of client trades are electronic, and workflows automated (to increase efficiency and make more prices to clients). These greater levels of automation and electronic trading have led to increased market velocity, which translates into a greater need for speed and lower latency, as markets react more quickly to events.

When it comes to FX Swaps and Forwards, the result is that trading firms need fast, scalable, and robust technology to manage this change, where thousands of data points need to be accurately priced along a forward curve. As an example of the scale of the challenge, a large Market Making bank can price up to 20,000 data points, which quickly adjust when the market starts to move.

Old technology and models that solely rely on prices based on FX Swap points published by brokers are particularly vulnerable, as these data points are not only among the last to update in times of movement, they also do not cover relevant points such as the central bank dates and turns that show the largest effect.

How is the use of data changing?

Data is vital to be able to accurately price along the forward curve. DIGITEC and 360T partnered to launch Swaps Data Feed (SDF), which filled a gap in the market, providing a unique, independent, and reliable source of FX Swaps data, taken from major FX banks. This enables clients to build their own fully automated and accurate real-time curves.. SDF is based on participating banks raw pricing, which represents Interbank quality.

Modern pricing models also require the speed and accuracy that are found in the STIR Futures market. Instruments like the one-month and three-month USD SOFR Futures or the still prevalent three-month EURIBOR Futures increasingly form the backbone of FX Swaps pricing. They do however need to be supplemented with market data from other assets, creating the need for a pricing engine that is able to combine multiple data assets and sources into one cohesive model.

While the short end of the curve is based on Futures, the long end required to price Cross-Currency Swaps will need to be built out of Swaps.

DIGITEC is seeing growth in the regional bank segment. Why is this?

In the past, many regional banks could not justify the investment in on-premise applications deployed and managed on a bank’s own server infrastructure, and instead used Excel to price FX swaps. The recent adoption of SaaS applications deployed in the cloud makes specialised pricing engines more affordable and accessible for an increased number of firms, helping the market to finally move away from relying on Excel.

Over the last two years we have seen much of our new business growth come from the regional bank sector, following the launch of D3 Lite (a SaaS version of the D3 pricing engine) to enable them to price FX swaps and forwards, providing key functionality in an intuitive web-based GUI, with auditing functionality.

Is interbank e-trading the final step in the electronic evolution of FX Swaps?

For FX Swaps to automate further, there is a requirement for an efficient and increasingly more automated interdealer FX Swaps market to help firms make markets to clients and efficiently risk manage their positions.

With this in mind, 360T and LSEG offer electronic interdealer FX Swaps trading venues, and many other markeplaces are looking into establishing new and additional venues . At DIGITEC we developed D3 OMS, to increase workflow automation and enable traders managing FX Swaps risk to connect directly and efficiently place orders in these interdealer FX Swaps venues.

By launching D3 OMS we are making trading workflows more efficient and flexible. As with any market that is evolving to a more electronic structure, we expect the result to be increased volumes on electronic interbank matching platforms. This in turn will drive increased market liquidity, greater participation, improved client pricing and risk management, and for the FX Swaps market to grow for the benefit of all parties.

We launched D3 OMS in September this year and are seeing a great deal of interest, some from our existing bank clients and some completely new relationships which plan to use D3 OMS as a standalone product.