The existing models for cross- border securities trading require an investor to either pre-convert their funds to the currency of the market i.e. Pre-Trade Model or have their Custodian or Broker perform the conversion after the underlying trade is done i.e. Post-Trade Model. What are the main shortcomings of these arrangements?
Pre-Trade model requires an estimated amount to be converted ahead of the underlying securities trade of which the final price and the FX rate, as well as the timing, remain uncertain.
- Slippage issue – mismatch of the settlement amount
- Timing issue – resulting in exposed foreign currency balance
- Execution certainty issue – the limit orders may miss the market completely
Post-Trade model avoids the above issues but creates new ones.
- Lack of control of FX rates – custodians or brokers have the upper hand.
- Inability to control total settlement amount – the final amount in investor’s portfolio currency tends to be unknown and the investor could end up paying more than intended or receiving less than expected.This makes effective stop-loss limits and take-profit level uncertain.
How does TRC differ from this current approach and what are its key features?
TRC allows both immediate market order or price limit orders to be submitted in the currency of the investor’s portfolio and the accompanying FX rate only happens if the underlying securities trade is matched i.e. At-Trade model. The imputed FX rate is gathered from the world’s best interbank liquidity, and this ensures that there is a single source of truth and price for all. This makes the Pre-Trade and Post-Trade models redundant and eliminates all their inherent shortcomings. This may also impact the ADR or secondary listings products as investor accessibility is resolved by the ability of each venue listing a security in as many currencies as its investor base.
Whilst FX has remained an OTC product and thus not directly subjected to MiFID II “Best Execution”, once a primary venue has implemented the full blown TRC At- Trade solution, and combining it with near interbank FX pricing component, any other Post-Trade prices would not be able to compete nor satisfy “Best Ex” criteria.
What direct advantages does TRC offer investors?
All investors regardless of trade size or portfolio size should theoretically get the same price i.e. foreign security expressed and settled in portfolio currency terms.
This level playing field will encourage greater diversification of investor type in each market as well as investor origination. For instance, an Asian investor may start to participate in European markets other than the traditional US market.
This pricing fairness is sometimes the reason why cross border trades are currently lower than its full potential, with too many activities still contained within domestic markets instead of diversifying to other geographies as a basic portfolio diversification.
The price clarity allows the investor to be able to buy, track and sell within narrower price bands since the greatest unknown i.e. the FX rate or the settlement amount is now known.
What are the benefits to trading venues and its trading member firms?
Venues and its members want one thing – to increase trading volumes. It is of little benefit if investors trade infrequently due to lack of clarity or execution certainty or perceived pricing unfairness with respect to the currency conversion part of the settlement. With the limit order in
the currency of the investor’s, the execution certainty is assured, and this should increase the overall velocity of trade i.e. the time taken to buy, hold and sell.
The same venue has velocity increase due to TRC At-Trade model. This is the most obvious lever and multiplier to its aim of increasing trade volume and revenue for all participants.
For venues that operate in each time zone apart from US market, it would become a preferred destination of secondary listings to virtually create a fungible near 20-22 hours of price discovery from Sydney opening to New York after-market trading.
So, the race would be to anchor itself in each of the time zones to have this multi-currency solution before other venues steal a march.
Even venues within continental Europe must grapple with multiple major currencies such as EUR, GBP, CHF, PLN, SEK and so on, despite being closely associated by distance and history.
This same challenge applies to both Asian (ASEAN) markets and the Middle Eastern (GCC) markets.
What sort of firms are likely to benefit from TRC and please give us some examples of typical user cases?
TRC can run as a cloud-based or co-located Over-The-Top plugin to existing Order Management Systems. Operational risk from taking FX positions and having to monitor open positions from Brokers and Securities firms will be reduced and eventually become non-existent. Brokers and Asset Managers can now show their Securities and other Asset classes in various currencies, thereby increasing the trading of these securities and Asset classes, increasing volatility in the process. The TRC solution through Straight Through Processing allows for automated end-to-end workflow with lower latency and higher throughput on all our valid use cases mentioned above. Both inbound and outbound flows can benefit from TRC at the Broker or Asset Manager level.
How can firms currently get access to TRC?
M-DAQ has local teams in UK/Europe, Japan, Korea, China, Hong Kong, Singapore, Indonesia, Sri Lanka to collaborate and create A World without Currency Borders®.
What plans do you have for extending the functionality and capabilities of TRC?
Our main objective is to roll out the product at the exchange level as a new service, which will allow all members to access the service and reap its benefits as they wish. We also have intentions to roll out TRC even to countries that have restrictions in currency flows by partnering with local FX providers to allow investors of all sizes to be able to participate in the Global Capital Markets.
Founded in 2010 with a vision to create a World without Currency Borders®, M-DAQ Group is a Singapore-headquartered company that empowers businesses in various industries to facilitate cross-border transactions with its best-in-class FX solutions. M-DAQ has embarked on a global growth plan to capture market opportunities and to create a new fintech ecosystem, focusing on providing specialised technology-enabled financial services to enterprise customers and other downstream fintechs. Backed by global institutions such as Affinity Equity Partners, Ant Group, EDBI, NTT Communications and Samsung, M-DAQ Group has processed over S$43bn of cross-border transactions over 45 markets since 2016, when it launched its Aladdin FX solution. M-DAQ crossed net profitability in 2018. This has enabled the Company to harness its technology to invest in new business lines while maintaining a strong balance sheet. M-DAQ’s technological solutions rely on the use of big data through its predictive engine and a proprietary algorithm supported by two-thirds of the world’s foreign exchange liquidity providers. The business has also won multiple inaugural fintech and enterprise awards over the years.