FX Clients - May 2003

Spring 2003 / ISSN 1050-0782
FX Client, London – New York

Come together

Tech-savvy corporates are leading a trend to trade with their banks from the same platform they use for dealing with internal subsidiaries. Stuart Fagg reports on the impact this has on risk management, costs and the bank-to-client relationship

FX clients have long held the view that the biggest benefits to be gained from electronic dealing are better risk management and increased straight-through processing.

Now, after years of being courted by banks touting their e-dealing platforms, some of the more technologically-savvy corporates are taking matters into their own hands. Building platforms that they can use for both internal dealing and for trading with these banks, brings the greatest efficiency, these firms say. And if the sell side wants their custom, banks are going to have to offer their prices on these client dealer systems.

After the rise of multi-bank trading, welcome to the new world of single-client portals.

Singapore Technologies (SingTech) is one of the leading firms in this field. Present in over 50 cities around the world, the Singapore - based conglomerate is active in a diverse array of businesses, including engineering, the media, semiconductor production, construction, ship repair, real estate, communications, information technology and asset management.

After reviewing its group treasury and FX operations, SingTech decided to build its own trading platform in conjunction with US technology firm FNX.

The big pull of this model for SingTech is better management of risk and FX exposure

Called Prismlight, the service began trading last November, covering spot FX, FX forwards, non-deliverable forwards, swaps, and money markets transactions.

"Essentially we were trying to address the issue of spreadsheet-based treasury management. Many of our subsidiaries were managing their treasury exposures on spreadsheets," says Chia Kew Sim, director of operations and marketing at Singapore Technologies in Singapore. "We thought this was certainly not the way to manage risk in such a diversified conglomerate. That forced us into thinking of a common platform to empower our subsidiaries to do whatever they needed to do."

The platform matches internal deals between SingTech subsidiaries without using an outside party. In the event that a deal can not be matched, quotes can be requested from ANZ, Bank of America, Commerzbank, Citigroup, HSBC, Chinese Banking Corp, Standard Chartered, SG and SEB.

The big pull of this model for SingTech is better management of risk and FX exposure - points echoed by an official at German chemicals giant BASF, which has a similar e-trading model.

BASF matches a "significant amount" of its FX deals internally using a platform from Frankfurt-based 360T. This new entrant into the world of foreign exchange trading systems hosts a multi-asset class, multi-bank trading portal, but also licenses the technology to be used for in-house dealing as well. German aviation firm Lufthansa and Deutsche Telekom use this software, as well as BASF.

"We have many risk positions with subsidiaries, and internal matching helps offset those positions," says Klaus Böhm, vice-president of finance at BASF's treasury headquarters in Ludwigshafen in Germany.

BASF is testing external systems as well, Böhm says, "but this one has the benefit that it works both ways".

SingTech and BASF report a single platform for internal and external dealing is easier to manage. But perhaps more importantly are the cost benefits - both through cost savings as a result of error reduction and internal matching, which means fewer external trades, and lower costs on a day-to-day basis.

But implementing such a platform is not without its problems, says Mark Warms, chief marketing officer at multi-bank portal FXall - which has also customised its multi-bank B2C platform to support internal dealing for "a number" of corporate customers.

To ASP or not to ASP?

A critical requirement of systems capable of supporting in-house and external dealing is
delivery via an application service provider (ASP), says Chia Kew Sim at Singapore Technologies.
ASP delivery, which means the technology is hosted by a vendor off site from the user's location, is vital for a global corporate's needs: "Without that it is impossible to achieve consolidation on a global basis. If, as a multinational headquartered in Singapore - or anywhere else - I have a standalone treasury system integrated into a portal, I am still blind as far as my operations in the other parts of the world are concerned. Consolidation, if any, would be patchy and ineffective. If you are a company with global operations, it represents a sub-optimal use of resources."
Security, lower maintenance costs and easy upgrades are also big draws, say ASP users.
"Singapore Technologies was very focused on delivering the benefits of an ASP to all its users,"

says Farid Naib, chief executive at SingTech's platform's co-developers FNX in Philadelphia. "These include minimal implementation risk, access to critical functionality at reduced cost, little or no maintenance expense, and advanced technology delivered simply and securely"
360T's platform is also delivered on an ASP basis - as is FXall's main platform. However, Mark Warms, FXall's chief marketing officer, says for the more bespoke elements of FXall's
customised software, integration requirements mean FXal1 must operate on a local basis "Our main trading system connects 43 providers with multiple trading locations to thousands of users worldwide. To provide timely updates and enhancements, an ASP model is required. Our competition, which uses local software for trading, are at a disadvantage here," Warms says "But to ensure seamless bespoke integration for our customers, we supplement the ASP model with local development."

"Are internal customers dealing only with their central treasury department or are they allowed to deal with banks directly? Are there rules where certain- sized transactions are priced by central treasury and others go automatically to a bank for pricing?

"Does the central treasury manually make prices or do they require a rate engine? Is the account name booked internally the same as the name bank sees? These are the questions we are addressing," says Warms.

"When talking to clients and understanding their detailed requirements, you quickly learn that there is no single 'plug and play' solution for internal dealing," Warms says. "to succeed, we have had to build solutions for clients that are customised to meet their needs."

According to SingTech and BASF, it was the perceived inadequacies in the web-trading platforms offered to them by banks that drove them to seek other internal/external dealing systems. "When banks developed their systems, they had a different objective - to provide liquidity in the most efficient way possible," says SingTech's Chia.

"Price transparency is important, but we see it as something you can buy off the shelf," Chia says. "By doing that you miss a very important element of risk management. That led us to build a risk system embedded into a price discovery component, thereby achieving straight-through capabilities."

BASF's Böhm agrees. "Bank systems are geared towards doing business with the bank - that's natural, their interest is to attract business - they don't want to sell software," Böhm tells FX Client. "Those systems just aren't comfortable for in-house trading."

So does that render banks' dealing systems obsolete?

FXall's Warms thinks so. "Banks are not set up as technology companies," he tells FX Client. "Banks' systems provide foreign exchange prices and are not focused on solving customer workflow issues. Our focus on integration to client environments and continuous technological development will make it difficult for any single bank to keep up over time."

Yet some banks are fighting back. As the interbank industry jumps on a new trend for 'white-labelling' platforms and liquidity, a growing number of banks are replicating the model for bank-to-client trading. Barclays Capital, Dresdner Kleinwort Wasserstein and UBS Warburg are among those that now sell corporates forex and money markets trading platforms for internal dealing. They can then route pricing requests back to the source bank from the same platform.

Expanding market

Barclays - one of the earliest banks to offer in-house dealing services to its clients, having gone live with a version of its trading platform for Charles Schwab in 2000 - says this corner of e-FX is expanding fast. "There's been a lot of interest recently from corporates," says Vince O'Sullivan, a director at BarCap in London. "We're seeing a lot of them centralising their treasuries, and that's a huge driver for this."

BarCap's product for corporates, Internal Trader, is now sold as one of a range of whitelabel products - the others are aimed at financial institutions and banks.

Meanwhile, back at BASF, things certainly are moving fast. The firm is already looking at adding 'auto-dealing' to its platform, to enable subsidiaries in other timezones to deal without having to wait until the next day for deals to be confirmed. "This would allow for example BASF Australia or BASF New Zealand to do a deal at a time when we are not in the office," says Böhm. "As normally is the case with our subsidiaries, they always think the rates are better at the time when we are not in the office!"