Electronification, ironically, has introduced new risks for market stakeholders. John Stead, Director of PreSales and Marketing at smartTrade, explains. “As FX trading has evolved and electronified some risks such as human error have reduced whilst others have become more prominent such as an increased reliance on technology and an increasing complexity of trading platforms across the market both on the buy and sell-side,” he says.
A firm’s choice of service provider can impact its risk management workflows. For instance, cybersecurity and disaster recovery mechanisms are two examples of workflows that firms must pay attention to. Examining the nature of these risks is informative since they have resulted in unique and innovative solutions for buy-side FX risk management.
Legacy constraints and adoption issues
“A corporate participant’s primary source of risk,” says Jonathan Tunney, CEO of AtlasFX, “is due to their inability to properly extract required trading data from their OMS. This is often a giant Excel spreadsheet, that pulls Enterprise Resource Planning (ERP) data at the transaction currency detail level and matches that information against existing FX contracts, either through a treasury management system or some other type of database. There are often forecasting data and ‘one-off adjustments’ (e.g. tax, real estate) that can further complicate this process.”
This Excel-based OMS is obviously at odds with current market developments. For instance, increased volatility is pushing firms to better understand their workflows and remove inefficiencies. A patched-up OMS is unlikely to give them the data they need.
Cormac Walsh, Head of Product at Barracuda FX, an ION company, lists a few other events like the move to T+1 settlement and the rise of digital assets further complicating the risk management picture. “The SEC changing standard settlement from T+2 to T+1 for most broker-dealer transactions in securities has presented complexities,” he says. “Where transactions involve an FX component there are potential increased risks/costs which are most likely to be mitigated by closer integration of order management and execution systems on the securities and FX sides, and with the back office.”
“SA-CCR and UMR have increased capital charges, introduced more calculations in workflows, and created a need to further optimise capital,” he says. Unsurprisingly, firms are well aware of the additional risks their outdated OMS’ introduce. Yet, adoption lags and legacy systems continue to operate.
When asked why this is, smartTrade’s Stead explains that data migration difficulties were traditionally a roadblock. “Replacing legacy Risk Management systems has been a cumbersome and challenging process,” he says, “primarily due to integration difficulties and the potential risks associated with data migration.”
He explains that smartTrade has invested significant resources in solving this problem. “In particular,” he says, “there are two areas where we have made a significant impact. All of smartTrade’s solutions are modular allowing them to be incrementally integrated. Second, our cloud-based SaaS offerings speed up deployment times and lower upfront costs, making the shift from legacy systems more accessible and efficient.”
“It is still shocking when we come across prospects that have risk siloed in different books and systems with multiple seconds of latency.”
Atlas’ Tunney points out that there is a human factor to the lack of adoption too. “There is rarely someone in the FX risk management role who understands how all the pieces fit together completely enough to take a leadership position and simply state ‘this system is not working and is too risky to continue to operate’,” he says.
Does that mean change only comes about when firms experience a disaster of some sort? Tunney likens it to decisions ‘bathed with blood.’ “Too often, decisions to upgrade these antiquated FX risk management systems occur where there has been a huge mistake,” he says, “and management decides that they have no other option but to change.”
Despite this, he notes some progress concerning adopting new technology. “On the plus side,” he explains, “there has been more willingness to go with “best of breed” solutions that integrate well with other solutions, versus trusting that a single, bloated, expensive TMS that tries to do too much, but does it poorly, will be the answer.”
Replacing legacy Risk Management systems can be a challenging process
The best-of-breed solutions Tunney mentions rely on APIs to deliver efficiency. Every market participant is familiar with APIs these days, but how do they smooth risk management workflows?
Stead says, “Standard FIX and REST APIs make integration cost effective and quick. But they’re also rich enough to allow comprehensive data extraction, offering deeper insights into trade activity. They can also be customised to suit a client’s needs, giving them full ownership of data. smartTrade has integrated to over 130 liquidity partners including venues, banks, non-banks and other vendors not only for trading but also order and algo connectivity. This means we abstract the client from costly proprietary integration leaving them with a single normalised standard API for integration.”
He goes on to explain that APIs also enable data extraction and can be used with custom algorithms in smartTrade’s AlgoBox. “This facilitates automated management of risk, allowing for more dynamic and responsive Risk Management strategies.”
Tunney believes using APIs is a no-brainer, given the advances they represent existing processes. “APIs are a critical aspect of automation in the FX risk management systems,” he says. “Outside of robust API libraries, there are only manipulations of flat files that require manual data parsing to get to a usable format. This is incredibly dangerous as the fidelity of the data is often compromised in this process.”
Given all this information, how are modern risk management solutions and OMS improving workflows and building more efficiency?
New platforms and their attributes
“Moving away from Excel as the primary source of truth for trading decisions is the biggest improvement for FX Risk Managers,” Tunney says. “AtlasFX is designed for enterprise-level data management collection, aggregation, calculation, and for delivering exposure information in a timelier manner. This allows the risk manager to spend more time with analysis on trading decisions and less time with rote spreadsheet manipulation.”
Integration is a central theme when discussing these solutions. Tunney notes that modern risk management systems pull data from the ERP directly and cross-check datasets for integrity to prevent errors.
smartTrade’s Stead is well placed to offer the technology provider’s view of processes. He highlights real-time monitoring, the use of AL and ML, and seamless integration as drivers of cost efficiency. “smartTrade’s platforms enable immediate tracking and more importantly centralising of market risk,” he says. “It is still shocking when we come across prospects that have risk siloed in different books and systems with multiple seconds of latency. It is a deficiency we can immediately address and obviously reduces risks by an order of magnitude.”
“Our trading, OMS and payments solutions blend effortlessly with clients’ existing systems, creating a unified interface that simplifies risk management in real time. smartTrade’s technology not only reduces costs but also maximises capital utilisation.”
He highlights a few transformative aspects of modern risk management solutions that deliver outsized benefits. “Centralised risk management, live revaluation, predictive risk assessment abilities, custom real-time alerts, and the ability to use analytics-based signals in algos are game-changers.”
“Centralization ensures that control measures are consistent and allows for a more comprehensive understanding of potential risk factors,” he continues. “Live revaluation enables trading firms to understand the current value of their positions and potential exposure, allowing for timely and informed decision-making. Leveraging advanced analytics, our solutions can detect underlying trends and patterns in trading behaviour. By understanding these dynamics, firms can proactively identify potential risks and opportunities, optimising their strategies accordingly.”
“Finally, by integrating analytics-driven insights into algorithmic trading strategies, our solutions enable firms to automatically adjust trading activities based on real-time market conditions. This approach ensures a dynamic response to changing risks and helps in maintaining optimal risk-reward profiles.”
“Moving away from Excel as the primary source of truth for trading decisions is the biggest improvement for FX Risk Managers,”
Moving away from standard risk management solutions, ION’s Walsh notes that OMS platforms have evolved considerably to mitigate the risk management picture. “Order flow is automatically captured from internal and external channels and this ensures all orders are validated, credit screened, and routed appropriately,” he says. “Order management is also consolidated across voice and electronic channels. Modern OMS’ integrate deep into the eFX trading infrastructure enabling algorithmic hedging of market risk and incorporation of orders into price axes, thereby improving price construction algos.”
The benefits on offer for firms are significant. Walsh notes that these features ensure full order flow visibility. “Visibility controls allow order flow to be segregated by currency, sales coverage, trading desk location, etc. to eliminate information leakage,” he says. “Automated order handling ensures all regulatory requirements captured and adherence to Global Code policies are met and monitorable.”
“Automated management of FX orders in swaps and NDS, further integration to buy-side OMS’, and advanced algorithmic risk management are some features firms can look forward to.”
Firms can outsource order management to third party providers for out-of-hours coverage, currency specialisation, or white-label algo execution. As with risk management systems, Walsh cautions that replacing legacy OMS comes with challenges.
“Conduct a full appraisal of the ancillary manual workflows performed,” he says, “around the OMS to complete the full cycle and seek to automate as much as possible.” He recommends firms look at a solution’s ease of integration, deployment, and functional coverage when assessing options.
When asked for specific features, he notes the following. “The order capture mechanism APIs, multi-dealer portals, single dealer portals, buy-side OMS’, indirect flows, contribution to prices axes, credit system, eligibility and regulatory checks, and static data synchronisation, to name a few.”
Moving back to the risk management perspective, Tunney notes that the outsourcing question can be evaluated from risk management and an FX trading perspective. For risk management, he opines there’s no good reason for firms to build systems from scratch. “This would be akin to building your spreadsheet rather than paying for Microsoft Excel,” he says.
The picture is more complex when considering FX trading to mitigate risk. “Today most, if not all, of the trading is done in-house because there aren’t any adequate platforms to take over this activity,” he says. “In the future, there will be systems where corporates can simply upload their desired trades the night before and come in the next morning with a completed set of trades and a high level of assurance that those trades were executed at a fair and competitive price.”
“This will be a step function improvement over what can only be described as a meaningless and low value-added activity of actually performing FX trades. Of course, there will still be those in the ‘don’t know what they don’t know’ category that believe they can ‘feel’ the right time and method to execute FX transactions.”
Tunney believes these next-gen trading platforms will disintermediate many banking participants who are no longer absorbing risk in their market-making activities. “These next-generation oFX trading platforms will not only allow corporates to upload their desired FX trades to execution but will also allow for better matching against other commercial participants,” he says.
Choosing the right partner
So how should firms go about choosing the right partner? Track record is the first factor Tunney and Stead highlight. “There is simply no good reason to go it alone anymore as institutional knowledge can either be faulty and error-prone,” Tunney says. “Alternatively, it can simply leave the organisation when someone retires.”
Speaking of next-gen FX trading platforms, he says, “The most important attribute for these trading platforms will be transparency of pricing and execution costs. FX trading participants have rightfully earned a very bad reputation in this regard (e.g. FX fixing rate scandal) and this will be a major differentiator.”
“A partner with experience of firms of similar size and profile means it can offer trading, OMS and payments solutions that align perfectly with your business model without lots of customisation, ensuring a seamless partnership,” Stead notes. “An innovative approach leverages next-generation technologies like AI/ML to set you ahead of the curve, offering ultra-low latency data analysis and pattern recognition to deliver unprecedented functionalities.”
“A commitment to exploring and developing new technologies to solve tomorrow’s problems and proven expertise in the FX industry, with years of delivering tailored solutions, ensures a deep understanding of the unique challenges and dynamics of FX trading.”
ION’s Walsh is excited about the evolution of OMS platforms and their ability to help firms manage risk. “The ability to in-source and outsource market risk from partner banks for out-of-hours coverage and/or currency specialisation is a key feature on the horizon,” he says.
“Automated management of FX orders in swaps and NDS, further integration to buy-side OMS’, and advanced algorithmic risk management are some features firms can look forward to.”
Stead highlights an exciting initiative at smartTrade. “We already have a very rich and mature trading, OMS and payments offering, but we are determined to further push the boundaries of innovation! The next frontier is creating advanced systems to automatically assist clients, sales teams and traders by through ultra-low latency data analysis, processing vast volumes of information, and identifying complex patterns and signals that would be impossible for humans to detect. Looking forward, we anticipate further evolution in risk management platforms with enhanced predictive analytics, real-time decision-making support, and personalised, intelligent automation.”
Given its position in FX trading workflows, risk management is set to experience a technological shift. While the future is unknown, there’s no doubt that the market will witness exciting shifts soon.
Risk management in Retail FX
While institutional risk management tends to receive a ton of attention, retail risk workflows are just as challenging to manage. Specifically, brokers catering to retail clients need robust risk controls in place to prevent adverse incidents.
Cristian Vlasceanu, CEO of Centroid Solutions, is well-versed in the different risks retail FX brokers have to mitigate. “When it comes to running a retail FX Brokerage, there are different types of risks brokers need to consider,” he says. “Brokers must ensure they have an infrastructure that is built for financial trading. They should understand where they are getting their profits and where risks are coming from.””Furthermore, when dealing with multiple liquidity providers,” he continues, “it is crucial to maintain adequate controls over the trading activity with each counterparty. These controls should be automatically applied at the level of the trading engine.” So how can technology help brokers mitigate these risks and what should they look for in a service provider?
Terminology and analytics
Retail brokers handle large volumes of trading data and consolidating these datasets into easily-analysed information is challenging. “One option for brokers is to adopt a comprehensive risk management system that can consolidate data from trading platforms,” Vlasceanu says.
“With such technology, brokers will have the ability to define different criteria based on their requirements, such as providing real-time analysed results and displaying them in a meaningful way (e.g. graphs/charts/tables), real-time risk alerts, identification of client trading behaviour, trends, market conditions, and more. It can even provide the ability to take action when specific criteria are met.”
He goes on to explain that new-age tech can even integrate GPT AI and ML into risk workflows to ease daily operations. Brokers can identify risky patterns and potential risks much faster, leading to better decisions. The biggest value driver here is the insights a risk management platform delivers based on the data it collects.
Can data analysis reveal potential problems on the horizon in a predictive fashion? Vlascenanu believes so. “Brokers receive trades from various customer types across different regions. By analysing this trade data, brokers can identify and understand customer trading behaviour, enabling them to provide an offering suitable for specific countries, customer groups, and/or products.”
“Brokers can employ strategies, such as client sentiment analysis, client profiling, and/or client analysis, to monitor, mitigate, and prevent risks. These analyses can also provide brokers with more insights into their business, such as customer lifetime at the brokerage or the performance of the business.” Vlasceanu also points out that analysing historical trade data can help brokers correlate risky patterns between accounts and their trading patterns.
So what should retail FX brokers look for in a solutions provider? “Brokers must choose a provider that offers a comprehensive range of risk management tools that can help them manage market and credit risks, and their trading activity in real-time,” Vlasceanu says. “The service provider must offer technical support and training to assist them in understanding the system and resolve any issue,” he continues. “The ability to customize certain aspects of the risk management system is also an important factor.”
He also lists the diversity of trading platforms supported, integration with external systems like CRM and IB portals, and cost-effectiveness as important criteria to evaluate. “Choosing the right risk management provider is crucial for brokers to effectively manage risk and protect their business from potential losses,” Vlasceanu explains. “However, brokers should also have a clear understanding of their requirements, so they can analyse and see if the risk solutions can help them fulfill their risk management strategies and business goals.”