SPECIAL REPORTSPECIAL REPORTCollaboration, Costand Complexity
Work continues on modernising Post Trade FX
The FX market has always dealt withfragmentation and complexity but, as Frances
Faulds asks, in order to modernise, does theindustry need a wholly new model?

The foreign exchange market
has gone from a position ofstrength, in pioneering trade
automation, to lagging behindthe other OTC asset classes, interms of post-trade processing,
today. While the credit, interest
rate and equity derivatives
markets have benefited fromthe greater use of standards
and centralised solutions formore than a decade, the FX
market is still grappling withchallenges such as tradeconfirmation, options exercise
management, and more
recently, centralised clearing
and regulatory reporting.
While there is someevidence of centralisation,standardisation andcollaboration in the FX market,
it is not widespread enough136 | january 2018 e-FOREX

yet to have made an impact
and there is still much to bedone at an industry level. In
2015, IHS Markit launched
the first venue-neutral tradeconfirmation service for FX
options, with Citi and JP
Morgan confirming the firsttrades and more than 50 asset
managed firms signed up to
use the service, a significant
step in terms of enabling
counterparties in the FX
market to centrally confirm
trades.
Regulatory requirements
around central clearing andthe impact of the uncleared
margin rules for OTC products,
which have proved to be acatalyst for clearing, havebrought the clearing houses
into the FX market and thejanuary 2018 e-FOREX | 137

take up of clearing by FX firms,
on a voluntary basis, ahead ofany firm mandate. With thelaunch of clearing services forNDFs, (CME is folding FX NDFs
into its existing futures productset, so standardising them withfutures and LCH is dealing
with FX and NDFs by folding
them into its OTC product set,thus providing standardisation
but across a different set ofproducts) new operational andmargining efficiencies are being
made available.
In September this year, LCH’s
ForexClear service processed$1.2 trillion in notional andhit a new monthly record ofclearing more than 160,000
trades. Commenting on the
new records, Paddy Boyle,global head of ForexClear, LCH,
said: “These record volumes

demonstrate that the margin,capital, risk and operational
efficiencies that clearing brings
to the market are proving
persuasive to evermore market
participants.” Furthermore,with now 30 clearing membersof ForexClear, LCH says that
it is now seeing a growinginterest from the buy-side, andis expanding the ForexClear
offering with the launch ofclearing for G10 NDFs as well as
physically delivered FX options.
Although the launch of CLS
in 2002 was transformational
for the FX market, reducing
settlement risk and creating
efficiencies in processing, as theFX market is arguably maturing
into a low margin businesstackling the fragmentation in
the market and modernising
the post-trade infrastructure,that to some extent was built to
support voice-trading, remains
the biggest challenge facing
market participants today.
CLS standardised the market
for FX settlement and twoyears ago collaborated withNEX Optimisation, which has
been conducting compressionin other asset classes since2003, to launch triReduce
CLS FX service, a post-trade

Andre Choussy“Whether you are a bank, a hedge fund or an asset
manager, compared to a decade ago, it is probably
costlier to be in the FX market today because of theoperational, capital, settlement and the funding
related costs.”

138 | january 2018 e-FOREX

Source: Broadridge and GFT

SPECIAL REPORTSPECIAL REPORTCollaboration, Cost and Complexity
compression service for theindustry. This has alreadyeliminated almost $3 trillion ingross notional value from theoutstanding FX forward andswap portfolios. The service
has recently been enhanced toinclude more FX prime brokers
and there are further plans toextend the service to CLS third
party members and to buy-side
firms.

AUTOMATING END-TO-ENDNEX Optimisation includes
a portfolio of cloud-hosted
services needed to process atransaction from beginning toend, ranging from pre-execution
credit checking to multilateral
portfolio compression. Andre
Choussy, Head of Trade andPortfolio Management, at NEX
Optimisation says: “What weoffer covers multiple services
across the entire post-tradespace. We have trade matchingaffirmation and confirmation
layers, limit calculationengines, allocations engines,
then reporting engines, bothinternally, back to underlying
clients, and externally forregulatory reporting in Europe,
portfolio reconciliation
services; portfolio compression
services, treasury and collateralmanagement services and last
but not least we’ve started
developing some othersettlement and payment service
offerings. So, we have a whole
host of services, through theentire post trade life cycle fromthe moment the trade has been
executed all the way down to

Evolution of post-trade mutualisation – The table above highlights how FX is trailing behind other asset classes in the evolution of technology
and operations mutualisation which is required to truly unlock the industry benefits around shared investment.

the moment when that trade,or margin, has been settled.”
With these services in place,
Choussy says NEX Optimisation
is now spending time on further
developing services that reduce
costs for its clients, and the twocosts that the company has
been particularly focusing on
are capital related costs, as well
as funding related costs.
Due to the fact that a lot of
the new regulations are driven
by notional calculations NEX
Optimisation has developeda range of tools aimed at
reducing the amount of

notional that is actually in thesystem, whether it is throughnetting or whether it is throughcompression, to give tools toboth the sell-side and the buyside so that they can minimise
the notional that is booked in
the system.
Says Choussy: “This is linked
to reducing any funding andsettlement related costs thatare driven by the amount of thenotional – at the gross vs net
level of settlement, the numberof row items that are being
settled, and how those actual
settlements are being carriedout. That has been our recent

focus. How do we develop toolsthat help banks and buy-sideclients manage their capitalrequirements as well as theirfunding and settlement costs?”
In certain areas of the industry,a lot of the development workand a lot of the technologythat was built, historically, wasbuilt in a much more reactive
way, to address very short-term
problems. “By stepping backand providing clients with an
integrated solution for post
trade services, NEX Optimisation
can offer clients a bundledservice that simplifies theiroperational process.”january 2018 e-FOREX | 139

SPECIAL REPORTCollaboration, Cost and Complexity

FLEXIBILITY
But at the same time, clientswant flexibility and to be able toaccess as many different service
offerings through one single
connection. For example, NEX
Optimisation recently partneredwith high-speed payments
infrastructure provider, BatonSystems, to act as a distribution
vehicle for Baton’s settlement
payment services. In essence,
this means clients obtain an end
to end service, addressing all of
their needs and consolidating
all of the processes as muchas possible, but retaining theflexibility to utilise third parties
for specific components. “This“These record volumes demonstrate that themargin, capital, risk and operational efficiencies
that clearing brings to the market are proving
persuasive to evermore market participants.”

means we are offering them acentralised solution, but withinteroperability out to different
services,” Choussy adds.
Baton has joined NEX Infinity as
the first third party to provide
its services through the platform
and NEX Optimisation andBaton have been working witha multi-national bank client ofNEX Optimisation to deliver

Paddy Boyle

ST
P
Although there is greater automation in the
post-trade FX market, there is also greater complexity
140 | january 2018 e-FOREXSource: Broadridge and GFT

SPECIAL REPORTCollaboration, Cost and Complexity

Segmentation in the FX market

a new post-trade solution for
FX spot transactions delivered
through the NEX Infinity
platform, expected to go livein Q1 2018. Combining NEX
Optimisation’s matching andconfirmation services andenriching the resulting client
data with Baton’s settlement
and payments services will
enable faster asset movement
with, and between, banks.
But while some level ofstandardisation is beingbrought to the FX market for
the first time by the clearing
houses, Choussy says there
142 | january 2018 e-FOREX

is still not a lot of additionalstandardisation at this highinfrastructural, or macro, level,
and as a result the FX market
is still fragmentated in terms
of providers, whether it is in
numbers of execution venues ortechnology providers, and there
is still a lot of fragmentation
across the different segments ofparticipants in the market.
However, Choussy believes thatin some ways the fragmentationin the FX market has been
beneficial because it encourages
more competition and also
addresses the diversity of theFX market - that no two hedge
funds, no two asset managers,
or no two banks are really
identical in business operations.
“Each of them has a different
view of how they want toprocess trades and how theywant to handle operations.
So, there are still a lot ofidiosyncrasies out there, withexisting systems and existingend clients and so there is aneed to have different services,
for the different client segments- services concentrating ofprime of prime services, services
specialising in FX options, ortrading services. Some of thisSPECIAL REPORTSPECIAL REPORTCollaboration, Cost and Complexity
fragmentation is driven bymarket demand and it doesencourage a lot of competition,so some of it is good.”
According to Choussy, theindustry can deal with a certain
level of fragmentation butchallenges are downstream,
where the regulatory reporting
requirements are, as theregulators do want consistency
and standardisation. “Theregulatory requirements
are definitely encouraging
standardisation of reporting andare also encouraging the use of
integrated platforms that canconsolidate, normalise and thenstandardise the data, back to
the trade repository.”

the need to avoid duplicationof effort. Says Choussy: “Theend client also does not wantmultiple providers and vendors
providing services – in our case,if the client is already sending
us the trade data, via Traiana, toperform matching, to perform
allocations and confirmations,they would then expect that wetake that through to the traderepository to cut down the needfor them to connect to multiple
providers for the regulatory
reporting piece.”

But although there is greater
automation in the post-trade
FX market, there is also greater
complexity. This is inversely
effecting cost, and at this point
in time, Choussy believes theLEVERAGING EXISTING
regulatory costs have gotten
FUNCTIONALITY
the better of that equation.
NEX Regulatory Reporting“Whether you are a bank,can provide this service,a hedge fund or an asset
while still allowing for themanager, compared to a decade
individual upstream clients toago, it is probably costlier toactually retain some of thebe in the FX market today
flexibility and idiosyncrasies
because of the operational,
within their systems. So,
capital, settlement and thewhile a lot of the regulatory
funding related costs. NEX
reporting requirements force
Optimisation, will enables
standardisation, it is donebanks and buyside clients toin such a way that market
address each of these issues andparticipants are utilising thegenerate savings through thelikes of NEX Optimisation
use of an integrated solution
to normalise the data, andthat leverages our existing
standardise it for them, without functionality and the existing
the need for them to change
processes, and data that wemuch of their overall processing. are already collecting for our“We try to make it as painlessclients.”
as possible for the end-client.”

A NEW MODEL

Automation is still a cornerstoneof the post-trade arena, as is
144 | january 2018 e-FOREXAs the FX market continues
to grow and cross-border

The FX market was oneof the first to embrace
digitisation but theproduct dynamics make‘standardisation’ a challenge

transactions increase in sizeand value, so too does theexpectation of customers
in terms of lower costs andbetter services. A whitepaper,
published in April this year by
Broadridge and GFT, examines
the idea that a wholly different
model for the FX market isneeded; whether a possible
reshaping of the FX operationsmarket, capitalising on
mutualisation, would ease theburden of operational pressuresand shrinking Return on Equity(ROE) in the $5 trillion a daymarket.

mutualisation via a ‘full-service’
managed service provider(MSP), or a common utility for
operational functions.

The two financial services
providers have formed anindustry working group todefine a future state model,
and the paper, entitled ‘FXOperations: the next frontier
for mutualisation’, provides
what could be a blueprint for

Chris Davis, Vice President of
Global Sales at Broadridge
Financial Solutions, says thathigher levels of automation intrade execution, combined withlower transaction values andtighter margins are forcing acomplete re-think of post trade

processing technology andoperations for FX. He says; “Anytime a low value, low margintrade needs to be touched by ahuman being through manualintervention, any profit is almost
immediately lost. As a result, FX
players need to automate every
stage in the processing lifecycle;
they need to consider artificial
intelligence tools to eliminate
any manual intervention in the
trade processing lifecycle.”january 2018 e-FOREX | 145

“FX players need to automate every stage inthe processing lifecycle; they need to consider
artificial intelligence tools to eliminate any manualintervention in the trade processing lifecycle.”banks to compete on services
where clients are increasingly
expecting cost savings, andReturn on Equity (ROE) forbanks’ FX business lines remains
low at a time when many
firms have already exhausted
traditional routes of cost
reduction.
Davis says: “Banks continue toexperience unacceptably low
ROE and cost income ratios;
as such they need to look toDespite the fact the FX market
was one of the first to embrace transform the technology andoperations cost bases to drive
digitisation, as trade execution
was automated, in the complex ROE. FX is not immune to thisneed to drive out operational
global FX market, spanningcost inefficiencies, and post
multiple market segments
trade processing of FX, likeacross buy side, multi-national
corporations, retail brokers, and other asset classes, is not adifferentiator for any financial
individuals traders, the productdynamics make ‘standardisation’ institution.”a challenge. However, Davis
DRIVING OUT OPERATIONAL
says that Broadridge has
INEFFICIENCY
successfully helped businesses
By automating the trade
move to centralised post trade
processing lifecycle andprocessing models in othercapturing all activity associatedasset classes and while there
are some idiosyncrasies in FX to with an FX transaction withinconsider, sees no reason why FX a single open database, Davisbelieves that Broadridge iscould not follow a similar path.
enabling clients to perform“We expect FX to continue todeeper data analytics on theirdigitise all stages in the trade
FX business. “This level ofprocessing lifecycle” he adds.
transparency and data analysis
enables heads of FX to better
But Davis believes the current
understand the profitability
model for post-trade is fallingshort and it is getting harder for and cost dynamics of various
Chris Davis

146 | january 2018 e-FOREX

aspects of their business, and tomove towards a transaction cost
analysis model.”According to Davis, the diversityof the market is both anasset and a major challenge
for any FX player. FX market
participants need to be able tosource liquidity from multiple
providers and service diverse
client segments, manually andelectronically, across multiple
channels. “A robust, integrated
and highly open FX platform is
critical in the heterogeneous,complex and dynamic market.
Many legacy FX systems arechallenged when it comes tointegration and connectivity,often relying on third-party
tools to facilitate integration.
Broadridge’s FX solutions
have been designed withintegration at the forefront of
the architecture, which positions
our clients to respond rapidly
and securely to new venues andchannels to market.”
The reliance on legacy systems
that are not scalable and areprone to manual intervention,
as a result of years of a lackof investment in the middle
and back office is now being
more severely challenged as theindustry works to meet new
regulatory requirements, suchas clearing and reporting as wellas the requirements around bestpractice, but has the industry
come to a point where it canno longer further reduce costs
whilst not introducing any
additional operational risks?

Source: Broadridge and GFT

SPECIAL REPORTSPECIAL REPORTCollaboration, Cost and Complexity

Potential Functional Model – the next frontier for FX operationsThe Broadridge/GFT white paperargues that the FX market
is already behind equities,
derivatives and fixed incomein the adoption of centralised
managed services, offering
operational resources on topof a technology platform. The
blueprint that the paper lays out
proposes a way in which the FX
market could actually leapfrog

the other asset classes in termsof stripping away the causes ofbreaks, or unmatched trades,
and late payments with a single
processing platform for theindustry.
In the same way that the adventof CLS was a transformationalpillar in the evolution ofthe FX market, paving theway for increases in volume,participants and risk mitigation,
the proponents of the white
paper say that a centralised,mutualised operations model,
covering both CLS and non-CLS
transactions, could empowertransformation aimed directlyat the costly inefficiencies thatexist in the FX operationalmodel today.
january 2018 e-FOREX | 147