Developing an eCommerce strategy for corporate intra-group trading of FX and other OTC products does not necessarily involve large IT investments or legions of man days in assessment and implementation consulting. However, due to the fragmentation of buy-side technology and organisational structures it is most important to select a partner who is able to provide you with an individual solution in terms of both, connectivity and functionality.

Corporate treasuries serving as an in-house bank for their worldwide subsidiaries face an increasing internal deal flow. Along with the proliferation of in-house transactions a group treasury is confronted with the following challenges:

In most cases interaction between subsidiaries and their group treasury is not supported by the already existing front-office system. A consequent solution for the efficient processing of internal product requests, their execution and electronic documentation can be a web-based trading system that is capable of linking the group treasury to a flexible number of remote locations with minimal effort and maximum security.

Such a technology enables any diversified treasury organisation to benefit from process automation and STP with multiple risk and cost reductions across all workflows.

Implementation and Access
The Application Service Provider (ASP) model is the key technology to an increasing number of network software applications in the finance sector. Ever more performant and secure, ASP technology has become a widely accepted standard that is able to replace a first generation of proprietary ECNs and Intranet solutions, connecting an indefinite number of participants at a fraction of technical effort and cost involved.

The model is already being used with growing success to lift the traditionally telephone-based external trading of FX and other OTC products, such as Money Market, Interest Rate Derivatives and Commercial Papers, between corporate treasuries and market maker banks on a secure online connection for product request and execution.

So why not apply the same technology to all respective internal transactions and benefit from the favorable effects of a pay-per-use network infrastructure, workflow automation and electronic documentation?

From a mere technical perspective, this is an easy step to take. The group treasury will act as a price provider on product requests of its customers - the subsidiaries. With only a few adjustments in their local settings and a digital certification of their workstation for secure connection, subsidiary and group treasurers can access the centrally hosted software via their Internet browser.

Fostering individual policies
The more delicate task involved with developing a successful eCommerce strategy for internal trading of FX and other OTC products is to electronically reproduce the very diverse approaches of internal Funding, usually determined by the nature of the underlying operative business(es) and the overall strategic alignment of your corporate treasury activities.

Those two will again be reflected by a very individual set-up in Cash Pooling, currency accounts and degree of centralisation.

The first question is that of your general behaviour towards netting and hedging. Are you following a strategy of microhedging or are you aggregating numbers of internal request into large net-positions, for purposes of managing group risk or to obtain favorable scale effects from a bulk squaring into the market? Do certain subsidiaries even deal on behalf of others before they square their positions with your group treasury? In most cases, the overall strategy will be a mixture of all, with a complicated differentiation across subsidiaries, instruments classes, notionals, currencies and maturity dates.

Another important consideration is, what benchmarks your internal funding is actually based on. Is it based on fixed rates that could be pre-set and traded upon for a certain interval or do you provide your subsidiaries with floating rates based on a periodically changing index like LIBOR. In some cases group treasuries will even want to base their internal pricing on live market data feeds.

Next, there will be the question of margins on the respective basic pricing which will again depend on fixed or floating benchmark rates, the strategic positioning of your group treasury as a cost or profit center and your overall hedging and netting policies. Based upon a thorough analysis of such internal infrastructure and risk policy the software has to be customised to your individual requirements. Depending on your risk appetite, your internal policies and traditional offline workflows, there are some important questions to be considered which will have a significant impact on the functional requirements of the technology.

Flexible Automation: Fine-tuning your internal eTrading
General goals of your internal eCommerce strategy will be significant gains in process efficiency and security both leading to measurable effects on cost/profit structure and risk reduction. The key drivers for these achievements are, very similar to external trading on electronic platforms, a high level of automation and integration of workflows across different software components.

Integration actually serves as a leverage of automation, as product requests, execution commands and deal documentations can be processed and filed in electronic formats from one system straight through to another via electronic interfaces. While integration and STP are a very interesting topic by itself, they become an increasingly facility issue thanks to standard interfaces, hub connections and common data formats. We want to take a closer look on the topic of automation involved with your internal eTrading strategy. Admittedly, the perfect world in terms of process efficiency could look the following.

An "auto trader", known from the system environment of market makers, is switched between an internal and an external corporate trading system, picks up all incoming internal requests and automatically routes them out into the market on a one-by-one basis. The best price out of the market - meeting a live rate benchmark requirement, will be executed automatically, electronically documented and routed into front and back office systems of all parties involved (subsidiary, group treasury and bank) including a pre-set internal mark up.

Unfortunately, this standard level of deal automation will interfere with a multitude of necessary procedural case differentiations according to requesting subsidiary, instrument classes, notionals, currencies and maturity dates, as mentioned before.

In some cases manual 'dealer intervention' will be required to make a difficult and unique decision, as the human brain is more inventive than any machine. In other cases the machine will be more accurate and fast than any human being by transacting errorfree standard procedures repeatedly.

However, the technology solution to tie both ends together is no rocket science. It is the already mentioned 'auto trader' in combination with a 'router' software between your internal and external eTrading environment with extraordinary flexibility of mapping all case differentiations according to your manifested workflows of internal funding.

Once set, the software will then act like a decision maker in a steplike tree model, knowing how to proceed with a specific internal request from your subsidiaries. It will alert you when 'dealer intervention' is required, like in the case of an unusually high notional, or it will continue with the automatic process of taking positions based on fixed or floating pricing or even follow the 'market link' via the external platform to square the position with banks.

Internally, you will be able to flexibly choose from a variety of different trading modes such as "Request for Quote", where you have to reply to indicative price requests from your remote units, or "Market-Maker Style", where you provide your remote units with instantly tradeable prices.

Bottom Line
Making such a strategy of internal eTrading FX and other OTC products work for you does not mean spending large amounts of money and implementation time. Thanks to the underlying ASP technology all individual mapping, pre-setting and continous maintainance of this solution can be conducted externally.