Market participants are implementing a variety of strategies and processes to optimise post trade FX processing as Paul Golden discovers.
To be successful and really add value to the market and client workflows, you need the network and the market infrastructure to interact with not just the two counterparties to the trade, but everybody else that’s involved in their workflow – including trading agents, custodians, outsourced middle office providers and other providers. “Everyone uses different systems for margining, risk management and settlement,” explains Louisa Kwok, head of TradeNeXus, a part of State Street’s GlobalLink’s suite of electronic trading and workflow solutions. “So while there have been advancements from a technology perspective that tackle different components, the challenge is to get everyone using the same system or have interoperability.”
Of course, standardisation is difficult to achieve in FX given the vast array of market participants and reasons to trade. The reason why the majority of the market continues to trade FX as OTC is because not all of it can be standardised to the same effect, adds Kwok. “But that does add complexity in areas such as T+1, T0 and ultimately atomic settlement, for example. This makes the post-trade space difficult because there are a wide array of workflows and niche scenarios that have been in place for decades.”
Optimisation opportunities
But despite the fragmentation of the FX market, there are certain parts of the workflow that can still be optimised suggests KY Chong, head of business development at TradeNeXus.
“One example where workflows can be optimised is agreeing settlement netting figures with a counterparty,” he says. “You don’t want to be doing this over the phone or email if there is a technology or a platform that allows you to have one common way of doing it across all your counterparties. By using technology you could potentially create a consistent workflow.”
“While there have been advancements from a technology perspective that tackle different components, the challenge is to get everyone using the same system or have interoperability.”
Louisa Kwok
Kwok’s suggested approach is to automate as many processes as possible as well as to monitor and assess risk factors, while focusing initial digitisation efforts on flows that are already streamlined. “At TradeNeXus, we use rules that clients can tailor to their use case to standardize workflow and normalize communication with other parties and will be providing clients with metrics to better identify areas of operational risk for troubleshooting. TradeNeXus is also a part of State Street’s GlobalLink Digital platform which is an interoperable smart desktop providing transparency from trade execution to settlement.”
In terms of technology investment, it is more about understanding what the problem is and finding the budget to allow you to implement what you need – whether that is completely new technology or an upgrade on your current process suggests Lisa Danino-Lewis, chief growth officer at CLS.
The move to T+1 in the US has helped encourage the buy-side to start automating and upgrading technology. However, in many cases this has happened following the introduction of the shorter settlement cycle in the US rather than before the implementation deadline of May 2024.
CLSTradeMonitor allows asset managers to monitor all the transactions that go through CLSSettlement in near real-time, across all their custodians and with all their executing brokers.
“Interestingly, whilst we were talking to asset managers and there was interest in this service before the move to T+1 in May, we have seen increased adoption since then,” says Danino-Lewis. “This reinforces the findings of a Citi survey from earlier this year that there remained a great deal of work to be done in relation to automation post the T+1 implementation.”
PvP push
The other regulatory issue that has affected CLS settlement members is the push towards PvP to mitigate settlement risk. The ECB has been particularly vocal on this matter over the last year and this has had an impact on settlement members who are looking across their processes and workflows to see where they can implement this mechanism, for example in cross-currency swaps where CLS has seen growth amongst the European banks. The values of cross-currency swaps submitted to CLSSettlement have increased by 87% year-on-year in Q3 2024.
Overcoming issues around manual processes, lack of standardisation and regulatory complexity requires coordinated efforts among market participants, industry groups and technology providers focusing on incremental improvements and identification of best practices suggests John Marchese, head of FX sales & partnerships at FactSet. “To help address this, Portware has partnered with OSTTRA and built a fully automated, post-trade toolkit for trade clearing and settlement via TradeServ,” he explains. “This allows our clients to have improved flexibility in how they trade, as well as full no-touch automation when it comes to settlement.”
In addition, industry collaborations led by bodies such as the GFXC, FXPA and FIX trading community aim to standardise best practices with the FX Global Code and improve execution transparency via standardised FIX rejection codes as well as developing common data standards.
Post-trade FX workflows still face inefficiencies such as settlement risk, operational complexity, reconciliation issues, data quality concerns, regulatory compliance challenges and latency issues, particularly in trade matching and settlement instructions, slow down the overall process, impacting liquidity and risk management.
Regulatory variations
These problems stem from legacy systems, non-standardised processing for certain currencies or instruments and the high costs as well as the integration complexities and operational disruption associated with upgrading technology according to Danny Green, head of international post-trade solutions at Broadridge Financial Solutions. “Additionally, variations in regulatory requirements across jurisdictions add layers of complexity for a truly global market like FX while cybersecurity concerns with the increase in digitisation and real-time data processing also deter full technological adoption,” he says.
Green notes that efforts to enhance technology and improve operational efficiency are complicated by variations in inbound FX feed structures. “Bespoke processes persist and post-trade workflows for non-CLS currencies, NDFs and FX options also vary by organisation,” he says. “Without standardised workflows, the introduction of new technology could require bespoke configurations and until the industry moves to more standardised processing, the manual effort of FX operations teams – the corresponding costs – will remain.”
“One example of where workflows can be optimised is agreeing settlement netting figures with a counterparty but you don’t want to be doing this over the phone or email… “
KY Chong
One option for addressing issues relating to legacy systems without causing significant disruption is adopting a modular approach to migrating key functions to newer technologies, aided by APIs. Creating a centralised data store also allows organisations to displace individual system integrations.
“Technology partners are key to helping organisations meet these goals,” says Green. “For example, Broadridge has a strategic approach to componentise functionality across capital markets technology and we are also investing in the centralisation of data and leveraging a common ontology to help simplify data access.”
According to Haim Levy, director of product design at OSTTRA, one of the obvious areas of inefficiency in post-trade FX workflows is market events (NDF fixing and option exercise).
“The challenge is that the sources and the destination systems are not prepared to support these flows,” he says. “A further area of inefficiency is split shape transactions. Buy-side clients execute a trade that may be allocated across prime broker and direct accounts and source and destination systems are generally not prepared to support this flow.”
1. Graph 1.A: Adjusted for local but not cross-border inter-dealer double-counting, ie “net-gross” basis; daily averages in April; on-us settlement is where both legs of a trade are settled across the books of a single institution; respondents in 2013 and 2019 did not report whether on-us settlement was with or without loss protection.
1. Graph 1.B: Adjusted for local but not cross-border inter-dealer double-counting, ie “netgross”; daily averages in April; a few countries reported greater settled turnover than deliverable turnover in which case we use settled turnover as the denominator.
2. Turnover settled with multiple payments between counterparties (eg spot trades, outright forwards, FX swaps and currency swaps).
3 Each circle represents a country, and circle area is proportional to the deliverable turnover reported by that country.
1. Table 1: Adjusted for local and cross-border inter-dealer double-counting, ie “net-net” basis; daily averages in April; settled turnover may include trades that were executed before April but settled in April.
2. Turnover settled with multiple payments between counterparties (eg spot trades, outright forwards, FX swaps and currency swaps).
3 Pre-settlement netting is calculated as the difference between deliverable turnover and turnover settled.
Standard delays
Levy refers to lack of standardisation as a real drag on the industry. “We are seeing unnecessary costs, operational bottlenecks and inconsistencies creating a real limit on growth potential. It is time to break free from these constraints and rally the industry around common standards.”
Legacy systems can pose a significant challenge in the evolving post-trade environment, but it is crucial to recognise that not all legacy systems are created equal and that it is those systems that haven’t kept pace with modern demands and integration capabilities that truly hinder efficiency.
“A smart approach is to implement new technologies alongside existing systems, allowing for a gradual transition and maximising the value of prior investments,” suggests Levy. “Prioritising a scalable technology architecture is essential to ensure adaptability to future changes, allowing firms to leverage the strengths of their existing infrastructure while strategically integrating new solutions to meet evolving needs.”
“PvP allows clients to remove and reduce credit risk, which is obviously beneficial. The market is netting the vast majority of trades, but there are concerns about what sits outside that.”
Lisa Danino-Lewis
As for what is being done to improve risk management and increase operational resilience in an increasingly digital environment, Kwok observes that as market settlement and processing timelines shrink, technology is becoming increasingly important. “Regulations such as the Digital Operational Resilience Act or DORA in the EU are shining a light on technology risk management,” she says. “Regulatory and code change is continuing to come down the pipeline where it’s becoming more critical to find partners that are constantly reviewing the marketplace and working with clients to develop adaptive solutions,” says Kwok. “They also need to think about how new technologies integrate with current market infrastructure as well as their resiliency track record.”
Operational impact
The implementation of T+1 in the UK and EU later in the next few years will have an obvious operational impact. Firms will also feel the effects of Basel III endgame, with the prospect of negative impacts on banks in terms of calculation of capital that is subject to risk management feeding into client pricing.
“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.”
John Marchese
“Proactively managing your portfolio and working with counterparties to make sure that you are not causing heavy balance sheet usage is good practice in awareness of what is being reflected in pricing,” says Kwok. She says “In this scenario you proactively manage exposure after trade execution to either shift that exposure or compress it, freeing you up to trade with who you want to trade with or move your positions to stay within certain thresholds. There is also further benefit of reducing volume of transactions to manage through the lifecycle”.
Market participants also need to keep an eye on proposed changes to the FX Global Code, which include specifying that payment-versus-payment settlement should be used where available and discouraging the use of multiple standard settlement instructions for the same counterparty.
From a risk management perspective, Danino-Lewis refers to a focus on liquidity which to some extent has been affected by T+1. “PvP allows clients to remove and reduce credit risk, which is obviously beneficial,” she says. “The market is netting the vast majority of trades, but there are concerns about what sits outside that. These risks fall into two categories – participants who don’t use PvP, and the currencies where there isn’t a PvP solution available.”
To this end, it is encouraging that the first buy-side firms have joined the CLSNet platform, alongside global and regional banks. “Most organisations have an in-house netting solution – the real challenge is that those solutions don’t talk to each other,” explains Danino-Lewis. “CLSNet is a centralised platform which performs the netting calculations for over 120 currencies across various FX trade types, including same-day trades and NDFs and then sends the output to participants. It is the only platform available in the market that supports standardised and automated matching of netting process.”
“Variations in regulatory requirements across jurisdictions add layers of complexity for a truly global market like FX while cybersecurity concerns with the increase in digitisation and real-time data processing also deter full technological adoption.”
Danny Green
On the question of how lack of standardisation affects post-trade FX operations, she notes that in the discussions around T+1, the buy-side has been asking why custodian cut-off times are not standardised.
Timeline challenge
“One of the challenges we had was communicating to the buy-side that CLS timelines and deadlines are very different from those of custodians,” observes Danino-Lewis. “In respect to the questions on standardising custodian cut-off times there are several possible reasons for the variation, such as the structure of the business (for example, global versus regional). CLS is continually looking at ways we can help make the post-trade process simpler and more efficient.”
Improving risk management in FX post-trade processing is crucial to improving the trade lifecycle for all market participants.
“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,” says Marchese. “This empowers the buy-side trader to choose the best liquidity channel, without any concerns regarding subsequent settlement implications.”
As post-trade FX operations adopt advanced technologies, Marchese recommends firms focus on effective vendor management and invest in adaptable systems to ensure scalability and flexibility. “These strategic considerations – combined with industry collaboration and adaptive solutions – drive greater efficiency and risk mitigation,” he says. “As an example, FactSet – in partnership with OSTTRA – offers a best-of-breed automation toolkit to support the full end-to-end post-trade FIX messaging workflow for prime broker give-ups and NDF/CSF trade clearing.”
“We are seeing unnecessary costs, operational bottlenecks and inconsistencies creating a real limit on growth potential. It is time to break free from these constraints and rally the industry around common standards.”
Haim Levy
Technology advances
Advancements in technology and collaborative initiatives such as STP, CCP and dynamic credit limit systems, real-time liquidity monitoring and CLS services, AI, regtech and blockchain, and the Global FX Code are significantly enhancing risk management in FX post-trade processing.
“The more access to data FX operations teams have the better suited they will be to manage risk,” explains Green. “We have been leveraging advancements in AI and the firms we work with are seeing the advantages in terms of access to data and the ability to provide real-time responses to simple queries.”
Settle-to-market or STM functionality is one of the most interesting future developments in post-trade FX services. By settling variation margin daily, STM mitigates the risk of large unrealised gains or losses and allows for more accurate liquidity predictions. It also aligns banks and financial institutions with regulatory frameworks like Dodd-Frank and EMIR, which advocate regular collateralisation and centralised clearing.
However, Green acknowledges that there are challenges to adoption. For example, corporations using derivatives for hedging may find frequent margin calls disruptive to cash flow predictability, while significant operational and technological changes will be required for firms still using manual processes.
“STM (settle-to-market) offers a compelling alternative to central clearing for deliverable FX spot, forwards and swaps.”
Sofiane Nait Saidi
With round-the-clock trading capabilities in a digital world, firms need to maximise their STP rates, uptime and resilience. Automation and cloud computing enhance efficiency and scalability supporting ‘stress levels’ of trading, while real-time exception handling built into post-trade operations helps address failures arising during the post-trade workflow.
“Comprehensive cybersecurity strategies protect against increasing threats and robust incident response plans ensure quick recovery,” says Green. “Standardising data formats and ensuring data quality reduce operational risks. Regular audits, employee training and strong governance frameworks support continuous improvement and collaborative efforts and strategic partnerships further bolster system resilience and innovation.”
As post-trade FX leverages new technologies, market participants must consider regulatory compliance, cybersecurity, technology integration and operational efficiency. Evolving regulations and data privacy laws demand adaptable compliance tools and robust data governance, while cyber threats necessitate advanced security measures and incident response plans.
“New technologies like AI and machine learning rely heavily on the underlying data,” says Green. “Organisations that can centralise data across the trade lifecycle will be in a better position to leverage these new tools and gain insights to evolve their business. Sustainability and ESG considerations will also influence strategic direction.”
Market participants need to keep an eye on proposed changes to the FX Global Code
Risk mitigation
In the risk management space, OSTTRA has focused its development efforts on delivering solutions designed to mitigate operational, credit and liquidity risks through a robust and efficient workflow.
The firm’s documentation management tools streamline and standardise trading agreements, while real-time limit monitoring provides immediate alerts and notifications. Automated rebalancing capabilities facilitate business continuity by safely redistributing available credit while kill switches provide a critical safety net, allowing for automatic or manual shutdown across multiple credit accounts to prevent catastrophic losses.
“Enhanced operational resilience in the increasingly digital FX post-trade environment can be achieved through a multi-pronged approach that includes migration to the cloud, robust single sign-on solutions, comprehensive telemetry for real-time monitoring and flexible APIs for seamless integration,” adds Levy.
Sofiane Nait Saidi, OSTTRA’s executive director product strategy notes that the firm is developing settle-to-market functionality in close collaboration with a working group of leading banks who recognise its potential to transform FX post-trade processes.
“This collaborative approach ensures that STM delivers tangible value and addresses a clear market need,” he says. “Specifically, STM offers a compelling alternative to central clearing for deliverable FX spot, forwards and swaps. It provides significant capital benefits by lowering SACCR counterparty credit exposure at default and improves liquidity management under the net stable funding ratio.” Unlike centrally cleared transactions, bilateral STM transactions in these products avoid initial margin, default fund charges and the costs associated with complex liquidity backstop frameworks.
“Our STM and PvP service for currencies such as CNH, TRY and PLN provides something different to the services available from other providers,” says Nait Saidi. “By working closely with the industry, we aim to deliver a robust and efficient STM solution that optimises capital and liquidity efficiency while minimising operational complexity.”
Unlocking the potential of post-trade FX processing
Market participants are implementing a variety of strategies and processes to optimise post trade FX processing as Paul Golden discovers.
To be successful and really add value to the market and client workflows, you need the network and the market infrastructure to interact with not just the two counterparties to the trade, but everybody else that’s involved in their workflow – including trading agents, custodians, outsourced middle office providers and other providers. “Everyone uses different systems for margining, risk management and settlement,” explains Louisa Kwok, head of TradeNeXus, a part of State Street’s GlobalLink’s suite of electronic trading and workflow solutions. “So while there have been advancements from a technology perspective that tackle different components, the challenge is to get everyone using the same system or have interoperability.”
Of course, standardisation is difficult to achieve in FX given the vast array of market participants and reasons to trade. The reason why the majority of the market continues to trade FX as OTC is because not all of it can be standardised to the same effect, adds Kwok. “But that does add complexity in areas such as T+1, T0 and ultimately atomic settlement, for example. This makes the post-trade space difficult because there are a wide array of workflows and niche scenarios that have been in place for decades.”
Optimisation opportunities
But despite the fragmentation of the FX market, there are certain parts of the workflow that can still be optimised suggests KY Chong, head of business development at TradeNeXus.
“One example where workflows can be optimised is agreeing settlement netting figures with a counterparty,” he says. “You don’t want to be doing this over the phone or email if there is a technology or a platform that allows you to have one common way of doing it across all your counterparties. By using technology you could potentially create a consistent workflow.”
“While there have been advancements from a technology perspective that tackle different components, the challenge is to get everyone using the same system or have interoperability.”
Louisa Kwok
Kwok’s suggested approach is to automate as many processes as possible as well as to monitor and assess risk factors, while focusing initial digitisation efforts on flows that are already streamlined. “At TradeNeXus, we use rules that clients can tailor to their use case to standardize workflow and normalize communication with other parties and will be providing clients with metrics to better identify areas of operational risk for troubleshooting. TradeNeXus is also a part of State Street’s GlobalLink Digital platform which is an interoperable smart desktop providing transparency from trade execution to settlement.”
In terms of technology investment, it is more about understanding what the problem is and finding the budget to allow you to implement what you need – whether that is completely new technology or an upgrade on your current process suggests Lisa Danino-Lewis, chief growth officer at CLS.
The move to T+1 in the US has helped encourage the buy-side to start automating and upgrading technology. However, in many cases this has happened following the introduction of the shorter settlement cycle in the US rather than before the implementation deadline of May 2024.
CLSTradeMonitor allows asset managers to monitor all the transactions that go through CLSSettlement in near real-time, across all their custodians and with all their executing brokers.
“Interestingly, whilst we were talking to asset managers and there was interest in this service before the move to T+1 in May, we have seen increased adoption since then,” says Danino-Lewis. “This reinforces the findings of a Citi survey from earlier this year that there remained a great deal of work to be done in relation to automation post the T+1 implementation.”
PvP push
The other regulatory issue that has affected CLS settlement members is the push towards PvP to mitigate settlement risk. The ECB has been particularly vocal on this matter over the last year and this has had an impact on settlement members who are looking across their processes and workflows to see where they can implement this mechanism, for example in cross-currency swaps where CLS has seen growth amongst the European banks. The values of cross-currency swaps submitted to CLSSettlement have increased by 87% year-on-year in Q3 2024.
Overcoming issues around manual processes, lack of standardisation and regulatory complexity requires coordinated efforts among market participants, industry groups and technology providers focusing on incremental improvements and identification of best practices suggests John Marchese, head of FX sales & partnerships at FactSet. “To help address this, Portware has partnered with OSTTRA and built a fully automated, post-trade toolkit for trade clearing and settlement via TradeServ,” he explains. “This allows our clients to have improved flexibility in how they trade, as well as full no-touch automation when it comes to settlement.”
In addition, industry collaborations led by bodies such as the GFXC, FXPA and FIX trading community aim to standardise best practices with the FX Global Code and improve execution transparency via standardised FIX rejection codes as well as developing common data standards.
Post-trade FX workflows still face inefficiencies such as settlement risk, operational complexity, reconciliation issues, data quality concerns, regulatory compliance challenges and latency issues, particularly in trade matching and settlement instructions, slow down the overall process, impacting liquidity and risk management.
Regulatory variations
These problems stem from legacy systems, non-standardised processing for certain currencies or instruments and the high costs as well as the integration complexities and operational disruption associated with upgrading technology according to Danny Green, head of international post-trade solutions at Broadridge Financial Solutions. “Additionally, variations in regulatory requirements across jurisdictions add layers of complexity for a truly global market like FX while cybersecurity concerns with the increase in digitisation and real-time data processing also deter full technological adoption,” he says.
Green notes that efforts to enhance technology and improve operational efficiency are complicated by variations in inbound FX feed structures. “Bespoke processes persist and post-trade workflows for non-CLS currencies, NDFs and FX options also vary by organisation,” he says. “Without standardised workflows, the introduction of new technology could require bespoke configurations and until the industry moves to more standardised processing, the manual effort of FX operations teams – the corresponding costs – will remain.”
“One example of where workflows can be optimised is agreeing settlement netting figures with a counterparty but you don’t want to be doing this over the phone or email… “
KY Chong
One option for addressing issues relating to legacy systems without causing significant disruption is adopting a modular approach to migrating key functions to newer technologies, aided by APIs. Creating a centralised data store also allows organisations to displace individual system integrations.
“Technology partners are key to helping organisations meet these goals,” says Green. “For example, Broadridge has a strategic approach to componentise functionality across capital markets technology and we are also investing in the centralisation of data and leveraging a common ontology to help simplify data access.”
According to Haim Levy, director of product design at OSTTRA, one of the obvious areas of inefficiency in post-trade FX workflows is market events (NDF fixing and option exercise).
“The challenge is that the sources and the destination systems are not prepared to support these flows,” he says. “A further area of inefficiency is split shape transactions. Buy-side clients execute a trade that may be allocated across prime broker and direct accounts and source and destination systems are generally not prepared to support this flow.”
1. Graph 1.A: Adjusted for local but not cross-border inter-dealer double-counting, ie “net-gross” basis; daily averages in April; on-us settlement is where both legs of a trade are settled across the books of a single institution; respondents in 2013 and 2019 did not report whether on-us settlement was with or without loss protection.
1. Graph 1.B: Adjusted for local but not cross-border inter-dealer double-counting, ie “netgross”; daily averages in April; a few countries reported greater settled turnover than deliverable turnover in which case we use settled turnover as the denominator.
2. Turnover settled with multiple payments between counterparties (eg spot trades, outright forwards, FX swaps and currency swaps).
3 Each circle represents a country, and circle area is proportional to the deliverable turnover reported by that country.
1. Table 1: Adjusted for local and cross-border inter-dealer double-counting, ie “net-net” basis; daily averages in April; settled turnover may include trades that were executed before April but settled in April.
2. Turnover settled with multiple payments between counterparties (eg spot trades, outright forwards, FX swaps and currency swaps).
3 Pre-settlement netting is calculated as the difference between deliverable turnover and turnover settled.
Standard delays
Levy refers to lack of standardisation as a real drag on the industry. “We are seeing unnecessary costs, operational bottlenecks and inconsistencies creating a real limit on growth potential. It is time to break free from these constraints and rally the industry around common standards.”
Legacy systems can pose a significant challenge in the evolving post-trade environment, but it is crucial to recognise that not all legacy systems are created equal and that it is those systems that haven’t kept pace with modern demands and integration capabilities that truly hinder efficiency.
“A smart approach is to implement new technologies alongside existing systems, allowing for a gradual transition and maximising the value of prior investments,” suggests Levy. “Prioritising a scalable technology architecture is essential to ensure adaptability to future changes, allowing firms to leverage the strengths of their existing infrastructure while strategically integrating new solutions to meet evolving needs.”
“PvP allows clients to remove and reduce credit risk, which is obviously beneficial. The market is netting the vast majority of trades, but there are concerns about what sits outside that.”
Lisa Danino-Lewis
As for what is being done to improve risk management and increase operational resilience in an increasingly digital environment, Kwok observes that as market settlement and processing timelines shrink, technology is becoming increasingly important. “Regulations such as the Digital Operational Resilience Act or DORA in the EU are shining a light on technology risk management,” she says. “Regulatory and code change is continuing to come down the pipeline where it’s becoming more critical to find partners that are constantly reviewing the marketplace and working with clients to develop adaptive solutions,” says Kwok. “They also need to think about how new technologies integrate with current market infrastructure as well as their resiliency track record.”
Operational impact
The implementation of T+1 in the UK and EU later in the next few years will have an obvious operational impact. Firms will also feel the effects of Basel III endgame, with the prospect of negative impacts on banks in terms of calculation of capital that is subject to risk management feeding into client pricing.
“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.”
John Marchese
“Proactively managing your portfolio and working with counterparties to make sure that you are not causing heavy balance sheet usage is good practice in awareness of what is being reflected in pricing,” says Kwok. She says “In this scenario you proactively manage exposure after trade execution to either shift that exposure or compress it, freeing you up to trade with who you want to trade with or move your positions to stay within certain thresholds. There is also further benefit of reducing volume of transactions to manage through the lifecycle”.
Market participants also need to keep an eye on proposed changes to the FX Global Code, which include specifying that payment-versus-payment settlement should be used where available and discouraging the use of multiple standard settlement instructions for the same counterparty.
From a risk management perspective, Danino-Lewis refers to a focus on liquidity which to some extent has been affected by T+1. “PvP allows clients to remove and reduce credit risk, which is obviously beneficial,” she says. “The market is netting the vast majority of trades, but there are concerns about what sits outside that. These risks fall into two categories – participants who don’t use PvP, and the currencies where there isn’t a PvP solution available.”
To this end, it is encouraging that the first buy-side firms have joined the CLSNet platform, alongside global and regional banks. “Most organisations have an in-house netting solution – the real challenge is that those solutions don’t talk to each other,” explains Danino-Lewis. “CLSNet is a centralised platform which performs the netting calculations for over 120 currencies across various FX trade types, including same-day trades and NDFs and then sends the output to participants. It is the only platform available in the market that supports standardised and automated matching of netting process.”
“Variations in regulatory requirements across jurisdictions add layers of complexity for a truly global market like FX while cybersecurity concerns with the increase in digitisation and real-time data processing also deter full technological adoption.”
Danny Green
On the question of how lack of standardisation affects post-trade FX operations, she notes that in the discussions around T+1, the buy-side has been asking why custodian cut-off times are not standardised.
Timeline challenge
“One of the challenges we had was communicating to the buy-side that CLS timelines and deadlines are very different from those of custodians,” observes Danino-Lewis. “In respect to the questions on standardising custodian cut-off times there are several possible reasons for the variation, such as the structure of the business (for example, global versus regional). CLS is continually looking at ways we can help make the post-trade process simpler and more efficient.”
Improving risk management in FX post-trade processing is crucial to improving the trade lifecycle for all market participants.
“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,” says Marchese. “This empowers the buy-side trader to choose the best liquidity channel, without any concerns regarding subsequent settlement implications.”
As post-trade FX operations adopt advanced technologies, Marchese recommends firms focus on effective vendor management and invest in adaptable systems to ensure scalability and flexibility. “These strategic considerations – combined with industry collaboration and adaptive solutions – drive greater efficiency and risk mitigation,” he says. “As an example, FactSet – in partnership with OSTTRA – offers a best-of-breed automation toolkit to support the full end-to-end post-trade FIX messaging workflow for prime broker give-ups and NDF/CSF trade clearing.”
“We are seeing unnecessary costs, operational bottlenecks and inconsistencies creating a real limit on growth potential. It is time to break free from these constraints and rally the industry around common standards.”
Haim Levy
Technology advances
Advancements in technology and collaborative initiatives such as STP, CCP and dynamic credit limit systems, real-time liquidity monitoring and CLS services, AI, regtech and blockchain, and the Global FX Code are significantly enhancing risk management in FX post-trade processing.
“The more access to data FX operations teams have the better suited they will be to manage risk,” explains Green. “We have been leveraging advancements in AI and the firms we work with are seeing the advantages in terms of access to data and the ability to provide real-time responses to simple queries.”
Settle-to-market or STM functionality is one of the most interesting future developments in post-trade FX services. By settling variation margin daily, STM mitigates the risk of large unrealised gains or losses and allows for more accurate liquidity predictions. It also aligns banks and financial institutions with regulatory frameworks like Dodd-Frank and EMIR, which advocate regular collateralisation and centralised clearing.
However, Green acknowledges that there are challenges to adoption. For example, corporations using derivatives for hedging may find frequent margin calls disruptive to cash flow predictability, while significant operational and technological changes will be required for firms still using manual processes.
“STM (settle-to-market) offers a compelling alternative to central clearing for deliverable FX spot, forwards and swaps.”
Sofiane Nait Saidi
With round-the-clock trading capabilities in a digital world, firms need to maximise their STP rates, uptime and resilience. Automation and cloud computing enhance efficiency and scalability supporting ‘stress levels’ of trading, while real-time exception handling built into post-trade operations helps address failures arising during the post-trade workflow.
“Comprehensive cybersecurity strategies protect against increasing threats and robust incident response plans ensure quick recovery,” says Green. “Standardising data formats and ensuring data quality reduce operational risks. Regular audits, employee training and strong governance frameworks support continuous improvement and collaborative efforts and strategic partnerships further bolster system resilience and innovation.”
As post-trade FX leverages new technologies, market participants must consider regulatory compliance, cybersecurity, technology integration and operational efficiency. Evolving regulations and data privacy laws demand adaptable compliance tools and robust data governance, while cyber threats necessitate advanced security measures and incident response plans.
“New technologies like AI and machine learning rely heavily on the underlying data,” says Green. “Organisations that can centralise data across the trade lifecycle will be in a better position to leverage these new tools and gain insights to evolve their business. Sustainability and ESG considerations will also influence strategic direction.”
Market participants need to keep an eye on proposed changes to the FX Global Code
Risk mitigation
In the risk management space, OSTTRA has focused its development efforts on delivering solutions designed to mitigate operational, credit and liquidity risks through a robust and efficient workflow.
The firm’s documentation management tools streamline and standardise trading agreements, while real-time limit monitoring provides immediate alerts and notifications. Automated rebalancing capabilities facilitate business continuity by safely redistributing available credit while kill switches provide a critical safety net, allowing for automatic or manual shutdown across multiple credit accounts to prevent catastrophic losses.
“Enhanced operational resilience in the increasingly digital FX post-trade environment can be achieved through a multi-pronged approach that includes migration to the cloud, robust single sign-on solutions, comprehensive telemetry for real-time monitoring and flexible APIs for seamless integration,” adds Levy.
Sofiane Nait Saidi, OSTTRA’s executive director product strategy notes that the firm is developing settle-to-market functionality in close collaboration with a working group of leading banks who recognise its potential to transform FX post-trade processes.
“This collaborative approach ensures that STM delivers tangible value and addresses a clear market need,” he says. “Specifically, STM offers a compelling alternative to central clearing for deliverable FX spot, forwards and swaps. It provides significant capital benefits by lowering SACCR counterparty credit exposure at default and improves liquidity management under the net stable funding ratio.” Unlike centrally cleared transactions, bilateral STM transactions in these products avoid initial margin, default fund charges and the costs associated with complex liquidity backstop frameworks.
“Our STM and PvP service for currencies such as CNH, TRY and PLN provides something different to the services available from other providers,” says Nait Saidi. “By working closely with the industry, we aim to deliver a robust and efficient STM solution that optimises capital and liquidity efficiency while minimising operational complexity.”