GTNews.com - November 2001




		October 2007 GTNews.com


		Keeping Up With the (e-)Joneses Jeremy Carvell, 360T - 30 Oct 2007

The old adage about keeping up with your neighbours is never truer than in the area of finance, and when it comes to e-trading, the UK is failing to keep up with its European peers, which have adopted more quickly to the benefits of e-commerce and STP. This article looks at the current state of the UK market and the future applications for the UK market and e-commerce.

The UK market, led in many respects by the City of London, has been at the forefront of many financial developments. Whether it be complex structured products, the adoption of European-wide policy or the use of vast liquidity pools, the UK has been a quick adopter to development and change.

Which makes it all the more surprising to be told that this has not crossed over the portals of many treasury departments within the corporate business landscape. The UK is one of very few countries where some of the largest FTSE 100 companies have still to make use of e-trading and its corresponding benefits.

Various surveys have shown that - at most - around 55% of the UK corporate market has implemented an e-commerce strategy and/or a straight-through processing (STP) solution.

FX Perspective As the BIS triennial survey of foreign exchange and over-the-counter derivatives markets has already revealed earlier this year, the daily turnover in the global FX market has shown a huge growth. During the last three years, the volume has increased by 71% to an average daily turnover of US$3.2 trillion.

In the UK foreign exchange market, the daily net turnover during April 2007 was US$1.359bn per day, 80% higher than was recorded in 2004.

There have been many factors contributing to the growth in recent years. Economic stability and growth and greater access to market liquidity have both been strong contributors. However, many professionals are convinced that the massive growth could only be achieved because of the access provided through e-trading. “It is certainly one of the reasons for this significant growth,” said one FX trader at a London-based bank.

As a result, it is no longer a question of “Will the buy-side accept e-trading platforms?” but rather “What are the requirements for further adoption of e-FX?”

Why Has the Corporate Marketplace Been Slow to Adopt?

It is perplexing, in this day and age, to be confronted with the question: why should I implement an e-commerce strategy? However, it is no secret that other countries in the EU were much quicker adopters of e-commerce than the UK. While many European markets have already benefited from the adoption of e-commerce, many UK institutions are only now approaching this area. Part of this has been the strong traditional links between the corporate treasury and its banking relationships; part of the reason has been the lack of functionality for the typical corporate treasurer within some systems.

Let’s deal with the easy part first: while FX forms a part of a typical treasury department’s requirements, other instruments such as money market loans and deposits, FRAs, cap/floors, FX options and interest rate derivates also need to be addressed. Why should you automate one aspect, only to face archaic practices in other areas? Some platforms can offer a multi-bank facility for cross-product execution, but the focus has mainly been on FX.

In addition, some corporate treasurers do still have concerns regarding IT security, increased spreads from their banks as a result of executing via a third party, transaction fees when using such portals and the loss of the personal relationship they have with their banks.

Many have seen the supposed high costs as a deterrent. A fully-equipped STP solution involves at least two aspects: a front office trading tool, and a back office system, capable of managing the position keeping. Go one step further and there is an ERM tool to be added on and a confirmation matching service, as well.

And if you find the thought of implementing all this off-putting, then look at some of the benefits: full market transparency, optimisation of resources, reduction in errors, availability of audit and compliance reports, instant update of the treasury management system, leading to instant feedback on cash positions and needs within the group.

But it still remains that while segments of the buy-side have fully adopted e-commerce, others are more reluctant. The UK buy-side is similar to that in other European countries and can be divided in two main groups: corporates and financial institutions. Financial institutions include asset managers, hedge funds, retail brokers as well as market banks, which are seeking liquidity from their counterparts and peers in the marketplace.

The institutions cannot now do without online trading and electronic platforms. The need to control risk better has required both institutional and corporate customers alike to have greater control and up-to-date information on their positions, hedging strategies and risk exposure. The development of real-time uploads into the back office system greatly enhances the up-to-the minute knowledge available to risk managers and treasury managers.

The benefits have long outweighed the downside risks of not having various systems in place to manage the operational and market risk.

The fears expressed by the corporate market are, however, unfounded. Steve Canning, sales manager UK/Ireland for 360T, argues that the acceptance from buy-side and sell-side of e-commerce and the regulatory requirements applying to e.commerce have made the e-commerce environment a much safer place.

“Nowadays, corporates can use e-trading platforms without any concerns regarding security of data and access. Tighter regulation and controls - whether internal or external - have lead to better management of the portals. Furthermore, the relationship to banks is actually enhanced as discussions between client and bank are focussed on more value-oriented conversations and not on a simple FX spot transaction.”

As a good example, Judy O’Mahoney, senior EMEA treasury operations manager at Apple, said: “We have been able to automate more of our daily activities and as a consequence, have more free time for more valuable projects. It has also enabled us to have better reporting and a better feel for the market.”

The improvement in technology has also meant it can better address itself more to the needs of the treasury operation. It is now possible to offer the same efficiencies to subsidiaries and empower them to take care of operations that previously added to the time of the group treasurer.

Exactly this shift down the pipeline is what has been done at Acergy M.S. based in southern England. Bente Salt, group treasurer at Acergy M.S. Limited explains: “E-trading in the treasury department has allowed us to push some treasury responsibilities back down to our operating entities, where they are closer to the underlying transactions and therefore can make better and more informed decisions about their FX risks.”

So What of the Future?

Each customer segment is driven by different needs. STP, improved efficiency and audit requirements (e.g. IAS39/FAS133 and Sarbanes-Oxley regulations) drive most corporate treasury departments, whilst for a hedge fund, it could be algorithmic trading. For more sophisticated FX customers, then FX options and FX strategies are a basic requirement.

For each customer segment, there are platforms that are directed to their needs. Corporates are moving more and more to multi-bank platforms, financial institutions such as asset managers, driven by European financial policy requiring auditable trade histories are also users of multi-bank platforms. Day traders have anonymous platforms designed to create liquidity providers and buyers with a pool in which they can trade. Hedge funds use often a combination of all three, and all entities may still see a role for the single-bank platform.

The single-bank platform is a screen connected directly to one bank. Although it can only supply one price to a given request, these platforms offer valuable ancillary services over and above mere execution and trading, for example, access to market research material.

What is clear is that as technology improves, various bells and whistles will be added to e-commerce platforms making them an invaluable asset to not only dealing FX but also aiding the performance of the treasury department. Functionality could include pre-trade counterparty credit limit checks, payment and transfers. Programming can even be made available which automatically analyses the position of the company in the treasury management system, uploads deal requests automatically into an execution platform, executes the transactions and receives the deal confirmation in real time.

As mentioned earlier, e-trading has opened up the market to greater transparency. New regulations are requiring those who deal on behalf of customers to be able to show ‘best-execution practice’. In former years, the banks were the main beneficiaries, now third party providers and the banks themselves have opened up this technology to all levels of dealing and customer segment.

As I stated at the beginning of the article, information currently available points to the UK market as having just over 50% e-commerce take-up in the corporate market place. The advent of FX portals, which has proven so successful in the European market place, and which offers a cross-product, multi-bank platform with a fully-automated STP into the back office treasury management system means that the benefits of e-commerce can now be rolled out to the non-institutional market segment. Around at least 80% of all corporates are expected to invest in an e-commerce strategy in the next three years.