October 2008
GTNews.com

e-FX Trading Trends for the Corporate Treasurer
- 14 Oct 2008

Electronic trading is not just for the banks and larger international companies, it is for everyone. Efficiencies are gained from the first execution and it does not have to cost anything either. This article explains the reasons behind the current growth and the trends and advancements for the future.

While it is well understood that the larger internationally-structured companies have shifted away from traditional telephone-dealing and that the trend clearly shows a strong growth in electronic trading (e-trading), the statistics nonetheless continue to point to a vast potential for further growth in the financial e-trading market space.

According to the Greenwich Associates’ 2008 Global Foreign Exchange Research Study, only just over half - 56% - of all corporate treasuries that took part in the survey worldwide are using electronic trading platforms to transact their FX, money market or general over-the-counter (OTC) treasury business.

That the trend towards e-trading is well underway is not in doubt. Over the last two to three years, the number of users has grown constantly and there is more to come. The Greenwich Associates’ survey predicts a growth of 11% within this market segment for the next year alone.

Since banks introduced their own single-bank platforms around 10 years ago, the banking community has been looking at the most efficient and cost-saving way to manage the FX flow business on standard transactions. Banks, more than any other group of market participants, use e-trading to minimise cost, minimise errors and create an automatic straight-through process (STP) including settlement to transfer of funds. As volumes increase, the trend towards managing this type of standard business transaction is set to continue.

Trend Towards Corporate e-Trading

On the corporate side of the business, it is not so much cost-efficiency as time-efficiency that pushes the trend further. A relatively simple and plain vanilla transaction - even just a spot transaction - can take up to 10-15 minutes to complete on the telephone and re-type into a back office system. If you have several to do in the course of a day, then valuable time is given up to this exercise. E-trading completes a standard FX transaction within a minute. Add an interface to the back office and the information is automatically loaded into the treasury management system and completed - maximum time used: two minutes.

The trend to greater use within the corporate treasury is also supported by external factors relating to technology improvements and, in some part, to internal factors within the corporate environment relating to compliance, audit and management controls.

E-trading platforms bring a number of advantages and can provide gains in efficiency to the corporate treasury environment. Increasing investment in treasury technology and products during the last years has lead to a new level of workflow automation and cost reduction in treasury operation. What had previously been advantages only in the domain of investment banking are now daily opportunities for any treasury department around the world.

One of the foremost gains is that of the aforementioned STP. Professional e-trading providers no longer just offer access to their trading platform but also provide standard interfaces to all major front and back office treasury management systems allowing the platform users to achieve real end-to-end STP.

The trend shows that it does not have to end there, however. Interfaces between back and front office can also flow the other way, enabling currency balances calculated within the back office system to generate automatically a trade request for execution.

Functionality for the corporate treasurer will increasingly play a role in product developments. Counterparty limits from the corporate perspective - particularly important at the current time - are just another factor that can be automatically managed with an e-trading platform. These limits can be automatically updated and provide an automatic exclusion of a liquidity provider whose limits have been reached.

It is a fact that as transaction volumes increase, so do error rates in a non-automated environment. For any organisation, the ability to use a platform and achieve a fully integrated STP enables greater access to liquidity with a service linking all the areas of the trading lifecycle. Platform usage and automation provide tremendous benefits. The key ones include:

• Workflow time is reduced by up to 80%, with up to 10 minutes shaved off every ticket transaction.
• There is greater price transparency and more competitive pricing.
• There is a significant reduction in errors due to a reduction in manual processes.
• There is a full audit trail for every electronic transaction.
• Both counterparties receive clear statistical analysis on availability, speed and quality.

What an automated process achieves above all else is an improvement in overall treasury control over the preparation, the defined request procedure, the quote gathering, the execution, and the input of data relating to any transaction. The greater the sophistication that can be built into systems, interface and execution portals, the better the position keeping of the treasury desk.

Platform Choices

The e-trading market place is likely to see a further contraction in the market sector focussing on anonymous trading. Some banks have already announced their dislike of not knowing who their counterparts are and having to stream prices to what is known as a ‘black pool’ - a source of liquidity where the counterparty is only revealed after the execution has taken place. The added factor relating to the corporate base is that it gives no opportunity for the basis of a relationship.

Going forward this leaves the focus on two types of platform: the single-bank platform and the multi-bank platform. The single-bank platform offers the advantage of a single relationship, a dedicated business flow (for the bank) and, in many cases, a package of market research or data delivered by the bank to the corporate treasury.

This is not, however, a guarantee of market performance or a sure way to achieve the best rates available in the market. Benchmarking against the market price suggests everyone gets the same price - which would not be true - hence the continued growth and simple convenience of multi-bank platforms.

With multi-bank systems, corporate treasuries can receive price information electronically in a fast and standard way from all their market makers of choice at the same time. The choice of counterparty remains open. Banking relationships are important and need to be managed. Banks should be recognised for the overall service they provide to a given institution and not just hammered down on price. Having the ability to select all your banks, and not just a limited selection, and then choose which one to trade with is important.

The use of e-commerce stemmed from FX flows. As mentioned already, the increased flow in FX instruments led to the adoption of e-trading platforms to capture the business in the most efficient way. Such standards are now applied to other instrument groups and have been expanded to capture the ‘non-direct’ counterparty flow. Now it is clear that users want to be able to use one channel to trade and manage as many standard products as possible in one window with all their relationship banks.

The other factor is ‘internal or non-direct’ corporate flow. There is a growing trend for treasurers to centralise flows and to operate as an in-house bank for affiliates and subsidiaries within the corporate structure. More and more companies are deciding to implement an intra-group trading solution to improve their internal liquidity management. In some companies, you find treasuries that are fully decentralised - where local business units have full control over FX exposure, liquidity management, bank relationships and payments processing. The IT infrastructure in such organisations is generally not integrated, and opportunities to reduce interest expense and bank fees are not realised. As treasuries and their parent corporations develop and mature, we see an increased focus on driving down the costs of treasury, especially funding and bank fees. This leads to regional and, ultimately, global treasury operations.

Through a flexible configuration tool, a centralised treasury can configure their own auto-dealer to manually price internal requests, or automatically price internal requests from a market data reference rate, or automatically create a back-to-back request into the market to fully hedge the internal exposure to the central treasuries counterpart banks. This automation can bring increases in efficiency while at the same time increasing control of the process.

The trend points to further growth and a wider acceptance of e-trading within the corporate treasury market place. One key is to find providers that match the cross-product diversity required and the relationship banking base. Further enhancements, however, will be driven by the treasurers. The demands for functionality to date are clear, but what of the future? That depends on you.

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