Reducing the operational burden: Work continues to streamline post trade FX   

In the last twenty years, the FX market has continued to see changes to its regulatory framework, market structure and participants, all amid a backdrop of rapidly developing technology and macroeconomic and geopolitical development. At the same time, the adoption of more efficient operating models is still a work in progress. For example, legacy systems still persist in some areas, as do inefficient and costly manual processes. There also remains a lack of integration between front and back-office systems while data is often unstandardised, lacking visibility and real-time delivery.

The end result of these two trends is that the operational burden on FX firms has continued to increase, especially in the post trade world where processes are dependent on some kind of efficiency. Efforts have been underway for some time to improve post trade processing through various means. 

For example, the adoption of digital technology and the use of automation could have a profound effect on operational efficiency; greater attention to risk management could improve processes further. And shortening the settlement cycle of T+1 may also bring more urgency to the post trade world which continues to develop at a slower pace than the rest of the market.

“While FX trading and notional volume continues to increase, post trade operations and processes have not changed significantly over the last few years,” says Amrinder Gill, head of post trade services, FX, London Stock Exchange Group (LSEG). “With this in mind, efficiency – including the cost of trade, processing, matching and then margin and risk of settlement, becomes more important for all market participants.”

Consequently, service providers such as LSEG have looked to develop services that will help streamline post trade processes, from trade allocations and ease of give ups to multiple STP solutions to clearing and settlement via its Settlement Center service.  

A lack of industry standards has not helped and efforts are underway to encourage more industry collaboration. “FX settlement remains an area where continued advancement towards standardisation and risk reduction, achieving real time settlement and payment-vs-payment (PvP) for cross border payments, is essential for the post trade ecosystem,” says Gill. 

“[Banking cooperative and financial messaging body] Swift’s continued work on the ISO20022 standards focused on FX settlement is a key step in the right direction, with more data and transparency in the payment messages to help reduce settlement risk,” says Gill. “Settlement Center continues to work with Swift and industry partners to ensure alignment with evolving standards. However, while this goes some way to help, and CLS settlement cycles for eligible currencies contribute meaningfully to minimise risk, the industry needs a more holistic move to PvP and real time settlement for all FX settlements.”

Swift continues to update standards to comply with ISO 20022, moving to a more standard message format for their electronic messages, which FX post trade across the industry hugely depends on, says Gill. 

“The changes are expected to bring more meaningful enrichment, compliance and harmonisation to ease cross border settlement. Additionally, the International Securities and Derivatives Association is updating their FX 1998 terms, which will help further standardise options and other FX derivatives, bringing more tradables into automated electronic trading and post trade processing,” says Gill.

Complex environment

Efforts to make the post trade process more efficient have been hampered by the inefficiency of the FX market structure, according to some. “The FX trading environment has grown increasingly complex and this is largely driven by heightened regulatory and industry initiatives such as MiFID II/EMIR in the EU/Dodd Frank in the US which puts focus on investor protection, market transparency, and financial stability, says Melissa Stevenson, Head of FX product management at ION.

“At the same time, disparate and fragmented front, middle and back-office solutions continue to create challenges. These issues result in low straight-through processing (STP), a lack of real-time analytics, and reliance on manual processes. These factors all undermine efforts to improve post trade efficiency.”

Client onboarding remains one of the critical pain points in post trade FX operations, says Stevenson, citing complex regulations, a reliance on manual and fragmented processes, and lack of data standards.

Some of the other challenges would be caused by the use of legacy technologies that cannot interoperate or integrate with newer systems, and the persistence of disconnected front, middle, and, back-office solutions, says Stevenson. 

“These issues directly lead to low STP, limited real-time data analytics, heavy overhead, and a reliance on manual processes, which in turn create delays, errors, increased costs and overall, reduce efficiency.”

The FX market also suffers from a lack of standardisation which has hampered efforts to improve post trade efficiency. “The FX market is global, fragmented and bilateral by nature,” says Stevenson. “It also lacks a unified regulatory framework and doesn’t have a central exchange, all of which makes achieving standardisation difficult. This lack of standardisation, in turn, continues to impact several specific areas of FX post trade. This ranges from client onboarding, bilateral netting and payment-versus-payment (PvP) arrangements to settlement.”

Stevenson cites providers such as CLSNet that are beginning to address some of these challenges by bringing standardisation and to the netting process for buy-side and sell-side participants. “At the same time, the adoption of ISO 20022 across more than 70 countries is bringing greater standardisation to the payments landscape,” says Stevenson. 

“This is improving STP and reducing manual intervention, which in turn reduces delays in customer settlements. Standard and enriched data also allow for improved data collection, leading to better analytics and insights.”

Risk management in FX post trade processing is being improved through a number of strategies, says Stevenson. “As part of the FX Global Code changes, specifically the amended Principle 35, market participants are expected to adapt their FX environment in eliminating settlement risk through payment-versus-payment (PvP) mechanisms, reducing exposure through automated netting of FX settlement obligations using services like CLSNet and minimising gross bilateral settlement wherever possible through CLSNet or other third-party automated netting solutions providing automated netting capabilities,” says Stevenson. “Internal risk controls are also being implemented, with a shift from manual to automated processes helping minimise risks related to settlement.”

The move to T+1 settlement has also created new challenges in post trade FX activities, particularly the increased risk of greater settlement failures due to shorter timeframes for pre-settlement tasks such as confirmations, affirmations, and allocations, says Stevenson. 

“To tackle these challenges, firms are investing in technology to automate end-to-end back-office processes. This includes exploring the use of AI to automate complex tasks such as trade matching, lifecycle oversight, and real-time data analysis. Examples include continuous matching, predictive modelling for resource allocation, and predictive risk profiling to reduce settlement failures, such as validating SSI details,” says Stevenson.

“Greater efficiency in processing can also support both current and future regulatory requirements, including accelerated settlement cycles like T+1 and even T+0. Finally, adopting PvP mechanisms and netting agreements helps mitigate associated risks.”

Increased collaboration between buy-side and sell-side companies, fintechs, technology providers, and regulators is also driving standardisation and data normalisation across post trade workflows, says Stevenson. “For instance, collaborations led by bodies such as the GFXC, FXPA and FIX trading community aim to standardise best practices through the FX Global Code. This enhances the efficiency of external interoperability and internal processes, enabling businesses to deliver better customer services while also achieving more efficient and cost-effective internal processes.”

The arrival and convergence of new technologies like DLT, AI and machine learning are likely to drive greater automation, transparency, efficiency and security in post trade FX operations. “AI and DLT in post trade processes can reduce the number of exceptions, minimise operational risk, and support compliance with evolving regulations,” says Stevenson. 

“DLT can provide a single transparent source for settlement, eliminating the need for reconciliation between different parties, which reduces both errors and settlement times. Use cases already emerging include real-time confirmation matching based on intelligent, flexible, and predictive rules, as well as analytics and predictive modelling to improve insights for resource allocation and reduced settlement failures.”

Looking ahead, the post trade FX landscape is expected to evolve further in several areas, says Stevenson. “The increased adoption of AI in post trade middle and back-office workflows will help streamline compliance checks, accelerate reconciliation, and optimise settlement workflows. A stronger emphasis on data-driven decision-making is also likely to emerge, as firms focus on enhancing transparency, consolidating data, and generating better insights into client behaviours. And finally, the expansion of digital currencies, including central bank digital currencies (CBDCs) and stablecoins, will facilitate near real-time settlement,” says Stevenson. “As more countries and banks issue their own digital currencies, demonstrated by the EU accelerating plans for a digital Euro, the structure of the global payment ecosystem will be fundamentally reshaped.”

Elevated volatility

Ongoing macroeconomic and geopolitical uncertainty has not helped in the effort to create a more efficient post trade FX market. But the complexity has made automation a necessity. 

“Since the implementation of tariffs in April, FX volatility has remained elevated. Firms are more active in managing FX risks through hedging,” says Haim Levy, director, product strategy at OSTTRA, the post trade services group and joint venture between CME Group and S&P. 

“This can add trades, counterparties and currencies to a portfolio and requires firms to better optimise and reconcile their positions. Automating processes such as portfolio reconciliation and compression and collateral management is the only way firms can mitigate these risks at scale without unduly burdening the middle and back-office teams,” says Levy. 

When it comes to the most critical pain points in post trade FX operations, settlement risk remains one of the main issues the market is trying to solve, says Basu Choudhury, head of partnerships and strategic initiatives at OSTTRA.

“New technologies like DLT and tokenised funds are expanding the time and scope of FX transactions that can benefit from PvP protection and netting efficiencies, enabling firms to better manage capital and settle funds 24 hours a day,” says Choudhury. 

“While new technologies like DLT and POvP are available and the front office is constantly innovating with faster trading methods, this rising high-velocity volume is often forced onto legacy post trade systems that weren’t designed for them. This disconnect inevitably pushes complexity, exceptions, and risk downstream.”

The second pain point facing the market is fragmented risk management, says Choudhury. “With the explosion of trading venues, getting a single, real-time view of credit and risk exposure is a huge challenge. Many firms still operate with siloed systems, meaning they can’t see their consolidated risk, which leaves them vulnerable to unexpected events.”

And third, there’s persistent regulatory uncertainty. “The rules are always evolving, and a lack of clarity often forces firms into reactive, costly builds for new workflows. Post trade operations are on the frontline of absorbing this constant churn and complexity,” says Choudhury.

So what is being done to improve risk management in FX post trade processing? The first step, says Levy, is to build a digital foundation. “This starts with the crucial, if unsexy, step of turning static legal agreements into structured data. It eliminates operational risk at the source and creates a single source of truth. Second, you leverage that foundation for real-time visibility. This means getting that live, consolidated view of credit exposure across all venues. This visibility is critical not just for monitoring risk, but for actively managing it. Another key tool we’re seeing used here is compression,” says Levy.

Once firms have that full, accurate picture of their exposures, they can net down trades to significantly reduce operational and credit risk, while also improving margin efficiency, says Levy. “In fact, the benefits of compression are a major incentive driving firms to consolidate their data in the first place.”

The final step is to use that visibility for dynamic control of the various risks. “This is the powerful part,” says Levy. “You can move from static limits to automated credit optimisation to use capital more efficiently. And for extreme volatility, you have vital ‘circuit breakers’—like a kill switch—to instantly mitigate catastrophic risk.” 

Collaborative industry efforts and new post trade FX-focused products would help to smooth the path to more automation. “Our strategy is to build open, interoperable networks and data standards to smooth the path towards frictionless straight-through processing and optimised accuracy, in FX and other asset classes,” says Choudhury.

He cites OSTTRA’s partnership with UK payments platform Fnality as a prime example of this commitment in action. “[Fnality’s] regulated wholesale payment systems allow banks to use digital representations of central bank money for instant, atomic settlements. By integrating Fnality’s system with our on-demand FX PvP settlement orchestration service, we are creating a network that moves FX settlement from rigid submission windows into an era of interoperable real-time on demand interaction. And by connecting our FX settlement services with [Singapore-based blockchain fintech] Partior’s unified multi-currency network, we are actively building bridges between fiat and tokenised commercial bank money to give clients true interoperability and choice.”

Further progress could be made by leveraging the rapidly developing digital technologies such as DLT, machine learning and AI, says Choudhury. “DLT is helping market infrastructure move away from slow, once-daily settlement processes. And by integrating with regulated wholesale payment systems, it enables instant, atomic settlements, creating a far more efficient, cheaper, and faster way of operating.”

Additionally, AI and Machine Learning can analyse and predict credit risk with greater accuracy, allowing for dynamic credit management and limit rebalancing. “This proactive approach helps to manage operational, credit, and liquidity risks more effectively,” says Choudhury. 

As for how the post trade FX landscape may develop in the future, Choudhury sees tokenisation as a key trend visible in not only FX but also in the wider market. Tokenisation, in which financial instruments are represented as digital tokens on a blockchain, has emerged as a way to introduce a more efficient, transparent and accessible securities market.

Some early use cases have involved stablecoins (privately run alternatives to fiat currencies), central bank digital currencies (publicly run and regulated) and tokenised shares. But we have also seen more recent use cases involving FX.

In July, UK high street bank Lloyds and investment manager Aberdeen Investment announced a UK-first involving tokenised securities used as collateral in an FX trade. More specifically, the transaction involved tokenised units of Aberdeen Investment’s money market fund and tokenised UK gilts were issued, transferred, and securely held by FCA-regulated digital asset exchange Archax on the Hedera Hashgraph public permissioned blockchain.

The potential benefits from such use cases could be significant from a post trade perspective, including real-time settlement and much better mobility of assets.

“Tokenised assets are providing greater flexibility for firms in how they post collateral and manage their FX risks. The rise of stablecoins and tokenised commercial bank assets has the potential to improve liquidity in niche currency pairs by giving firms flexibility in how they fund those trades,” says Choudhury. 

Another development is the growing adoption of application programming interfaces (APIs).  “API-Driven Connectivity will become the standard, creating seamless data exchange between all trading, risk, and back-office systems. This will slash operational risk from manual data handling,” says Levy

In addition, real-time AI Insight will make batch processing a thing of the past, says Levy. “The future is real-time telemetry on risk exposure, powered by AI that analyses massive datasets instantly. This enables firms to move from reactive problem-solving to proactive risk management,” says Levy.

“Proactive automated control will be based on AI instantly detecting and correcting processing breaks and performing dynamic credit optimisation, intelligently rebalancing limits across venues to maximise capital efficiency without increasing risk.”

Coordinated effort

Despite some recent technological advancements, the post trade FX workflow still grapples with inefficiencies such as manual processes, lack of standardisation and regulatory complexities, says John Marchese, head of FX sales and partnerships at FactSet’s FX trading platform, Portware. “Overcoming these issues requires coordinated efforts among market participants, industry groups, and technology providers, focusing on incremental improvements, identification of best practices, and standardisation initiatives,” says Marchese. 

He cites the various partnerships and initiatives to which FactSet has signed up. These include the alliance between Portware (FactSet’s enterprise trading tool) and OSTTRA to build an automated toolkit for trade clearing and settlement. “This allows our clients to have improved flexibility in how they trade, as well as full no touch automation when it comes to settlement,” says Marchese. 

Such partnerships are much needed given the extent of the work required to make the post trade FX landscape more efficient. 

The lack of standardisation in post trade FX operations has exacerbated the challenge because it has led to increased operational complexity, higher costs, greater risk of errors and more compliance challenges, says Marchese. “This hampers communication with your counterparts, and raises operational risks. However, efforts to standardise are underway through work being done by industry groups such as the GFXC, FXPA, and FIX Trading Community.”

These industry collaborations aim to standardise best practices with the FX Global Code, improved execution transparency via standardised FIX rejection codes, and have developed common data standards.

Meanwhile, legacy systems and workflows in post trade FX operations were often very manual and clunky, and left tremendous room for operational trade booking errors, and settlement risk, says marchese. “These systems often struggle with scalability and performance, and present compliance and security risks due to outdated protocols.”

Improving risk management in FX post trade processing is crucial to improving the trade lifecycle for all market participants involved, says Marchese. “Automating prime broker give-ups and clearing messaging for the real-money and hedge fund communities are crucial to reducing risk and expanding their access to new pools of liquidity in the market. This empowers the buyside trader to choose the best liquidity channel, without any concerns regarding subsequent settlement implications.”

The need for more operational resilience will also be critical in what is an increasingly digital environment be achieved in post trade FX. “Achieving better operational resilience in post trade FX operations requires advanced technology, strong data governance, increased automation, and robust risk management. Embracing automated trade clearing, or leveraging a solution like CLS is a step in the right direction to improve things operationally.”

Harnessing the power of emerging technology will also be critical to the task of making the post trade market more efficient, says Marchese. 

“The transformation of post trade FX operations will be driven by forward thinking and innovative technology firms that will leverage AI, Machine Learning, and blockchain. While early adopters may implement these technologies in the near term, broader industry-wide adoption in years ahead will depend on appetite from all involved,” he says. 

As post trade FX operations adopt advanced technologies, firms must focus on effective vendor management, and invest in adaptable systems to ensure scalability and flexibility, says Marchese. “These strategic considerations, combined with industry collaboration and adaptive solutions, drive greater efficiency and risk mitigation in the evolving digital landscape.”