Much has been made of existing inefficiencies within post-trade FX operations. The question is, where does the industry go from here? Do we need an overhaul of existing processes or is there a way to evolve them to meet market needs?
“I think there’s a lot that can be done in the FX market, especially within post-trade FX,” Laura James, COO of LCH ForexClear, asserts. “One of the hurdles is the sheer scale and number of participants in the FX ecosystem, probably the largest of any asset class, and it continues to grow.” With growth comes complexity and many of the challenges post-trade FX currently faces.
While challenges such as aligning the buy and sell side loom, James feels strategic partnerships point a way forward for the industry. What do these partnerships look like, and how can FX market participants come together to transform post-trade operations?
Participant collaboration and realising market reform
Kah Yang Chong, Head of Business Development at TradeNeXus, believes consensus and strategic partnerships between market participants are essential. “If market participants come to a consensus on a solution, adoption will be greater,” he suggests.
Chong advocates for an evolutionary approach. “It is important to build and improve on an existing ecosystem as this will help adoption of change, versus adopting a revolutionary product,” he says. “Strategic partnerships may be important to achieve this in the future.”
James echoes this point, proposing leveraging industry bodies to initiate crucial conversations. “I think what we need to do is use more [industry] bodies like GFMA, ACI, and others to actually start the conversation,” she says.
Meanwhile Steven French, Head of FX & Securities Product Strategy at OSTTRA, is optimistic about the industry’s capacity to work together towards a common goal. “FX Market participants have proven time and time again that they can work together to address changing market requirements,” French states, whether due to “regulatory change, industry guidelines or in reaction to macroeconomic events.”
“Industry bodies including GFMA and the Global Code are doing a fantastic job of bringing focus to those areas of FX (including post-trade) and are generating discussion, driving consensus, and publishing industry guidelines,” he adds.
As an example of collaboration, James mentions a partnership with Aladdin as “a big step for the post-trade FX ecosystem,” which aims to support FX clearing for asset managers and demonstrates how the industry is evolving even without mandates.
However, French notes that post-trade processes need simple solutions that avoid adding complexity, something Chong resonates with. “Greater agreement means listening to customers from ideation to delivery,” Chong says. “Ultimately, this is what drives value to clients, and delivers change.”
James states that industry forums are ideal venues to foster collaboration and set a path for the future of post-trade FX. “Like ACI’s Square Mile debate, we need to have a discussion around what the post-trade landscape would look like if we were to start today,” she says. “What steps do we take to get there?”
French notes that potential improvements must result in substantial efficiency gains, not just incremental improvements. “Improvements must provide measurable savings in resource, risk and time across teams and processes in order to realise true market-led reform,” he says.
Addressing the regulatory element
As with all markets, improvements to existing processes need regulatory blessing and initiative. James emphasises the importance of collaboration with regulators when promoting the benefits of improved processes. “We’re consistently working with all of the regulators and we think there’s numerous benefits to clearing,” she states, adding that these conversations span different jurisdictions.
Chong cites the T+1 initiative as an example. “Whilst driven by securities market changes, T+1 has had a positive impact on post-trade and FX through front-to-back operational and trading processes review,” he says. “This spurred a lot of discussions with clients on our side, to further understand their pain points and introduce new features.”
Basu Choudhury, Head of Alliances and Partnerships at OSTTRA, is quick to clarify the kind of regulatory reform the industry needs. “If by regulatory reform we are implying global mandates or “legal obligations” such as those that exist for other non-cleared OTC products, then the answer would likely be a firm no,” he says. “We could see a two-tiered ecosystem, where financial institutions in smaller countries would have high barriers to entry and lose access to key markets and trading parties.”
Instead, he points to the FX Global Code which focuses on adherence to principles as the right way forward. French notes that a lot of recent regulatory focus has been on risk mitigation within counterparty, credit, and settlement.
“No formal clearing mandate has been issued for the clearing of FX, despite the large notional amounts associated with FXOs, but we have seen a steady increase in cleared volumes,” he says. “This shows industry participants can work together when they recognise risks, but the time to adjust internal processes and systems can drag on when no official deadline is in place.”
While acknowledging incremental regulatory initiatives such as SA-CCR rolling out to European banks, James highlights the significance of regulatory developments in specific jurisdictions. “What’s interesting for us is what the individual jurisdictions are doing?” she says. “Because if you get a change in India or Korea, that actually allows or encourages new participants into clearing.”
Looking towards the future
James says an ideal future FX post-trade landscape will be centred around a central hub. Such a system could address the current “bifurcation of the flow” and allow for tailored optimisation, noting, “Different people and participants can optimise different things. Some might want to optimise margin, some might want to optimise capital.”
She also notes that strengthening the link between clearing and credit utilisation is critical, along with the importance of reflecting cleared trades in credit lines, which could free up trading capacity. “When you send a trade to clearing, that credit line should be freed up,” she says. “But what we struggle with today because of the convoluted ecosystem is actually once that trade is cleared, is that even feeding back up to the trader?”
Chong anticipates significant changes in the FX post-trade landscape in the future. “T+1 settlement will become the norm outside of FX hedging for securities trades,” he says. “This means less risk for the system as a whole, but requires more focus on post-trade FX to increase automation, data quality and improve processes”.
French believes a “defragmentation of processes through the streamlining of trade processing events, combined with greater visibility into operational tasks” is critical to continued post-trade development. “There is an industry-wide black hole in current operations processes between trade break management and T+1 reconciliation that OSTTRA are working hard to illuminate with the introduction of enhanced pre-trade technical onboarding capabilities and post-trade transparency across the entire post-trade FX ecosystem,” he says.
He states that this development coupled with “frictionless post-trade processing across the trade lifecycle” will revolutionise post-trade processing.
Given the number of significant developments in the pipeline, the FX market can certainly expect changes to post-trade processing soon, and hopefully fewer hurdles.