Foreign exchange trading, among the largest asset managers on the planet, is evolving well beyond the traditional ISDA-based risk transfer trade. Real money managers are now looking beyond traditional finance (TradFi) relationships by exploring primary market liquidity, peer-to-peer liquidity pools, and non-deliverable forward (NDF) matching pools. These additional avenues of liquidity allow the buy-side to realize three important benefits; firstly, to reduce market signaling; second, to match-off liquidity with peers at mid-market rates; and thirdly, to minimize their blotter exposure before looking to the traditional risk transfer trade.
Access to these pools of liquidity has traditionally been a complicated and bureaucratic credit establishment process that has limited most institutional money managers to direct ISDA credit relationships only. This has now changed; credit carve-outs via bank balance sheets (borrowing the bank’s credit) and the traditional prime brokers (PBs) are opening new liquidity pools for the real money trading community.
However, mixed credit workflows that combine ISDA and PB-based liquidity sourcing introduce a great deal of complexity to the tech stack. Not only does the buy-side have to carefully manage their selection of LPs based on the trade’s liquidity objective, but then the downstream settlement process becomes a very intricate series of allocation, give-up, and clearing messages.
The early pioneers in this trading space had to manage multiple manual processes to capture all the trade details through the execution process, the PB mark-up process, as well as the trade matching and clearing process. With so many hands touching each trade in the front office and back office, there was enormous room for operational errors in trade bookings and settlement. In one client example, orders were manually handled at five different stages of the trade and post-trade process before ultimately settling. There had to be an easier way.
Automating the post-trade process has become the newest challenge in the FX market, especially with the newly enacted Uncleared Margin Rules (UMR) guidelines and increased appetite for balance sheet optimization via NDF and cash-settled forwards (CSF) clearing. ISDA estimates that 775 entities will come into UMR scope for the first time with phase six. Recent data suggests that NDF clearing activity on OSTTRA, the post-trade joint venture owned by CME and S&P Global has risen by more than 30% in the first half of 2022 compared to the same period in 2021.
With UMR and NDF clearing in the crosshairs of the trading community, we took the view that the back office could benefit from our experience in workflow automation. Working in close partnership with OSTTRA, the global post-trade solutions company and new home of TradeServ, FactSet built a best-of-breed automation toolkit to support the full end-to-end post-trade FIX messaging workflow for PB give-ups and NDF/CSF trade clearing. This allows the buys-side trader to execute via the most optimal liquidity channel unencumbered by any post-trade considerations.
Clients of FactSet/IHSMarkit have the benefit of choice when it comes to their clearing. For example, TradeServ’s connections to the CME, LCH, Eurex, and HKEX allow the most flexibility to the buy-side community in terms of clearing venues options.
“We are committed to removing any clearing obstacles and operational friction for investment managers.”Patrick Philpott
Patrick Philpott, FX product strategy, at OSTTRA, adds, “We are committed to removing any clearing obstacles and operational friction for investment managers. Our longstanding connection with FactSet’s Portware enables the investment management community to use Portware to submit trades to OSTTRA on behalf of clients. The benefits to real money managers include improved time to market, easier clearing, and frictionless operational execution. Our clients tell us that they want choice; we support multiple processes for submitting trades, and are proud to be able to offer Portware and other leading Executing Venues as a quick and easy way to access clearing. Our unified platform’s connectivity with FactSet automates trade confirmations and clearing workflows for buy-side firms so they can focus on growing their clients’ assets instead of the maintenance of APIs and workflow rules.”
Automating the PB give-up and cleared trade messaging workflow is paramount in paving the way for asset managers who wish to explore new avenues of liquidity in the market. The introduction of a “no touch” workflow in the back office is being very warmly received, and people are already reaping the benefits of being able to freely access new liquidity pools.
One leading-edge asset manager, Eaton Vance (now part of Morgan Stanley Investment Management), has taken full advantage of these automated post-trade workflows to ensure a seamless (hands-off) process from trading all the way through clearing and settlement. Eaton Vance adds, “New trading platforms like Portware have enabled the trading desk to adapt to the evolving market structure of FX markets. Notably, we are able to optimize our counterparty risks, bridge market fragmentation, and access a variety of liquidity pools to achieve best execution via flexible execution protocols to better service our client’s needs. Portware’s straight through processing reduces operational risk and allows greater scalability, allowing our team to work more efficiently and minimize the risk of error.”
“I needed an automated solution which could scale from both a trading and settlement perspective.”Mike O’Brien
Mike O’Brien, Managing Director, and Head of Global Trading for Artisan Partner’s Emerging Markets Debt, has been a vocal proponent of clearing and automation. Mike states, “Having a best-of-breed, out-of-the-box solution was ideal for my trading desk as I stepped into my role at Artisan Partners. I needed an automated solution that could scale from a trading and settlement perspective.”
The automation of back office workflows has finally arrived, and for those progressive early adopters, the frustrating inefficiencies of trade settlement—which for too long were an accepted limitation and cost of doing business—have now been banished. The anticipated continuance of regulatory obligation, along with the emergence of digital assets, heralds a new age for OTC trading and one where smart automation across front, middle and back office workflows will be the MVP.