Five years since the first e-trading FX platforms were offered to clients, it is clear that a significant impact has been made on the market. In a world where e-commerce now overshadows the more traditional method of trading over the telephone, both sell-side banks and clients see the benefits of automation. It is now not unusual for sell-side banks to book over 50 per cent of FX trades using e-commerce, and automate the majority of those e-FX from request for quote through to confirmation and settlement. For example, at HSBC over 90 per cent of deals are quoted and processed automatically.
Many would argue that e-commerce trading is one of the reasons for the significant growth in FX as a whole, as banks support the trading of larger numbers of smaller size tickets, and clients transact FX trades ranging in size from more ‘normal’ amounts of $5-10m down to only a few thousand. At this stage it seems that the majority of small trades are being dealt over the internet and that larger trades are still being dealt over the telephone. However, this is changing as e-FX becomes ever more mature. According to ClientKnowledge, volume in e-FX has grown from 30 per cent of all FX volume in 2004 to 37 per cent in 2005.
In 2000, many market participants were discussing the benefits of e-FX trading and the market potential. In 2005, the question is no longer ‘Will clients accept e-commerce trading’, rather ‘What are the client requirements that will drive further adoption of e-FX?’
Single dealer platforms
Perhaps the most used e-commerce portals for trading FX are the single bank platforms. To many this may be surprising, as in 2002 some market experts were predicting the demise of single bank platforms. Rather than all business being dealt via multibank portals, the reality in 2005 is that both single bank and multibank platforms successfully compete for client business. ClientKnowledge reports that the single dealer platforms offered by top tier banks process over 50 per cent of their total trades. Looking at full year data from 2004, 65 per cent of HSBC’s total e-FX business was dealt over HSBCnet (a cross-product e-commerce single bank platform for clients of the Corporate, Investment Banking and Markets division).
The core proposition of any single dealer platform is to offer a trading platform that allows clients to do all of their FX trading in the same place. For example, HSBC recognises that clients are located world-wide and trade a wide variety of currencies. As a result, HSBCnet does not impose any minimum or maximum trading amounts, and supports the trading of 82 currencies including majors, minors, emerging markets and NDFs. Currencies added in the past month include Brazilian real, Russian rubel, Chinese yuan, South Korean won and Taiwanese dollar, and HSBC is looking to increase currency coverage further over the coming months.
Cross product solutions
For many clients, the main driver to trading FX online with one bank is to have direct contact with their relationship bank, while for others it is the bundling of services within one portal. It is acknowledged that the trading of FX is only one of a number of activities, and many clients see a clear benefit to be able to cross product lines within one portal. HSBCnet provides an example of this. Built to provide one point of access to trade FX and Money Markets, view research, FX options, FX flow analytics and FX charting, it also hosts cash management reporting and payments, securities and trade services. Rather than a bank simply offering a stand-alone FX trading platform, a portal allows clients to simplify work-flow across a range of services with their relationship bank.
The services offered to custody clients include real time reporting of transactions and positions. Portfolio detail registration and location details of each holding are posted, and the availability of each line of stock. Transaction reporting, corporate events and file uploads all form part of this module of HSBCnet.
By bundling different products under one platform new services can also be delivered. Banks have traditionally offered e-services that reflect those offered within their own product silos. This had also been the case with e-FX at HSBC until the recent introduction of a new service that is offered to clients making payments on HSBCnet. This simple service combines the approval of a foreign currency payment and acceptance of a live FX rate – all with one click. Clients benefit from being able to see the rate applied to a payment and the amounts in the base and paid currency. This compares with the traditional method of booking an e-FX trade on HSBCnet, then entering the payment module and making the payment while referencing the FX deal ID. The service is aimed at small payments being made from domestic currency accounts, and all clients involved in the initial roll-out have seen significant time savings compared to what was once a two tier process.
Work-flow solutions
The use of e-FX trading was driven initially by the technology-aware early adopters and more lately by users who see e-FX as a mature, stable product. However, there are now a significant number of potential clients who do not want either a bilateral or multibank service, rather an online FX platform that delivers their organisation clear work-flow benefits.
One potential solution implemented by some organisations with significant deal numbers is to develop their own trading platform and request their relationship banks to connect APIs which stream FX prices in real time, 24 hours a day. This is shown in figure one, which illustrates perhaps the ultimate aim for organisations that have a large number of trades. By installing a ‘black box’ that communicates between a treasury management system (TMS) or ERP and an e-FX platform, organisations can trade FX automatically. Within pre-defined limits, the TMS can automatically select which currencies and amounts to deal, then source prices and deal all without human intervention. The black box takes data from internal sources and translates it into a language the trading platform understands.
Provided the internal systems have been correctly configured, the role of the people trading FX changes from manually processing the deal, to exception management. This level of STP may seem futuristic, but has already been achieved by a small number of active organisations. While this delivers significant benefits, it is likely that only the very active traders can justify the costs associated with building and maintaining such a trading platform and the links to external APIs.
Another work-flow solution that delivers significant client benefits is an e-FX centralised treasury system, which connects a central site with its subsidiaries (see figure two below). Many of the larger and more established global organisations have developed regional treasury centres or a treasury head office, allowing them to benefit from economies of scale by centralising and concentrating flows. Expertise in financial markets is only required at the treasury head office, reducing the requirement for trained and experienced staff. In addtion, with a centralised trading unit, clients can put in place more stringent controls, thus taking a more proactive approach to compliance and satisfying audit requirements. Clearly, if an organisation has implemented a treasury head office they would require a trading solution that matched their work-flow. A centralised treasury system complements a treasury head office and allows the subsidiaries to book trades with the central unit, then enables the treasury head office to net trades and trade externally in a variety of methods, updating trades automatically with the treasury management systems.
A centralised treasury system enables centralised activities and offers a comprehensive solution to organisations globally, who are looking at centralisation in all its forms, and provides comprehensive functionality that allows a treasury head office to benefit from revenue and process efficiency improvements for FX transactions throughout the entire work-flow.
The functionality allows for collation and dissemination of FX trade information through an integrated online interface resulting in process efficiencies. Controls are also increased, and cost reduction can be achieved through pre-trade netting, reducing the number of transactions for external execution and thus the associated bid/offer spread.
In addition, organisations can benefit as straight through processing (STP) to client treasury management systems reduces the opportunity for internal errors. Also, organisations can choose the most appropriate method of execution to suit their work-flow and treasury policy. The usual ‘at market’ pricing via an automatic link to an e-FX platform or using a pre-determined benchmark are both options. The more bespoke central treasury solutions are formed of modules, which can be enabled as required to match the specific requirements of each organisation, and provide a truly integrated work-flow solution to solve the complexities of centralisation.
FX options
A relatively recent addition to the available e-FX services has been the trading of FX options. Although recognised that only a relatively small number of clients transact FX options online, those clients tend to trade significant volumes. As a result a small number of banks have added this capability to their e-services. HSBC initially saw a demand for options analytics, then added dual currency deposits (DCDs) and vanilla FX option trading functionality to HSBCnet.
At present, clients can trade simple puts and calls online, with the benefit of live pricing and the ability to modify parameters and re-price. Many predict that FX options will be the next area of significant growth for e-FX, as clients become more familiar with the products and use the e-commerce platforms to create a bespoke strategy that matches their requirements.
Banks are continually refining and adding to their e-FX services in response to client requirements. It is evident that those clients trading significant volumes require more bespoke solutions. This may be as simple as being able to trade more exotic currencies on a bank trading platform, having only one user name and password to access a range of services on one portal, trading FX options on the same portal, or requiring end-to-end work-flow solutions. As demand for more tailored services increases clients are comparing the offerings from different banks with great scrutiny as they look for the solution that is right for their organisation and their own specific job function.
Jake Smith is global manager, e-commerce, global markets at HSBC.
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