On April 25, Profit & Loss held the fifth in its series of e-commerce seminars, "Adopting the e-Channel: The How's and Why's", an event sponsored by Reuters and held at the City Conference Centre in London.

Featured speakers represented a broad cross section of the FX industry from both sides of the market divide. The seminar examined what would motivate clients to trade online and whether true STP was a myth.

The seminar took place against a backdrop of the fallout from the Atriax closure, and the subsequent move of their main liquidity banks onto one or more of the other platforms, so delegates were given an early opportunity to discuss issues emanating from this.

The first panel of the seminar aimed to discuss not only what would motivate clients to move their business online, but also what was hindering migration, and included views from a major fund manager and a corporate treasury, as well as two leading sell side institutions. Panellists discussed the obvious benefits of efficiencies and streamlining, but also looked at the psychological side of the equation.

The following extracts particularly referring to 360T, taken from the panellists' presentations and what proved to be very lively Q&A sessions with the full involvement of the floor, have been released with friendly permission of P & L Services Ltd, London.

I would like to give you a flavour of what we do at Lufthansa, and our experience in the online space. We are separated into two teams - a liquidity and interest rate management team, and a money market team. Last year's volume in money markets was about 73 billion euros; our FX volume was around 40 billion euros in absolute cross terms.

We started trading online in May 1999, when we installed Dresdner Bank's Piranha system. Technically, this is the platform which now forms the basis of FXall, only it has multibank capabilities. In July 2000, 360T introduced us to the idea of a multilateral system that effectively covered all treasury instruments in which a corporate would deal.

We liked the idea and the company raising the idea, so we signed a letter of intent with 360T, and assumed a pilot role with conceptual support. After quite a number of meetings and beta testing, we transacted our first FX deal in October 2001. We followed by transacting our first money market deal in January 2002, and extended this to trading interest rate derivatives, swaps and FRAs, in March 2002. We can now say that for the last month [March], 94% of our FX volume has been transacted on 360T.

What is still to come on 360T is the inter-company dealing module and commercial paper. Testing on the commercial paper module was started two weeks ago and we expect this to go live in six weeks.

There are two modules on 360T. One is TEX, a multi-dealer system for external trades between corporates and banks. This works just like any other portal: we enter a trade, send it out, get the quotes, transact, and the deal is done. A very nice feature of the system - which is unique to 360T - is that all the banks participating in the quote can see the prices of their competitors. This means they are entering something of an auction.

The other module, which is about to be installed, is I-TEX, which is the intra-company dealing system. We will have four of our subsidiaries on this platform; they will be able to deal directly with us. A feature of this is that the two systems are connected, so that a subsidiary - within limits - will be able to deal directly with the bank, without either party knowing. The subsidiary will only receive the best quote, and will be able to transact on that. Two deals will be established, one between the subsidiary and central treasury, the other between central treasury and bank.

The two trades will go straight into our treasury management system, GTM, and will be processed straight though to the back office for payment and for confirmation. That is STP.

So what is the benefit we have seen so far? The workload reduction we estimate at a conservative 50%; however, I would suggest it is 60 or even 70%. We reduced the number of dealers we use to execute business. We call at least two or three banks per deal, and now one dealer - working with the system - can fulfil the task of three or more. That means an optimisation of resource allocation, and those dealers no longer executing are now able to concentrate on strategy.

We have also seen the benefits of STP in a much-reduced error rate. We estimate a price advantage from the system of about one basis point in FX which we have on an annual basis. This means a 400,000 euro saving per annum. Other benefits include the availability of real time market data in all products, to our subsidiaries.

So, why 360T? For us the key was the variety of instruments. We believe that 360T, with their system, are the current technology leaders. We also like the transparency of pricing to the banks - it's not only that it's auction-like. Banks may improve their prices when they see they are outside the top five prices, and it is also a way to show banks where they stand with their competition. We also find that, because it is a small team, 360T is very flexible to client needs.

I spoke to our dealers recently, specifically about the system, and they stressed it was easy to use - it is also worth noting that two of our traders are over 60 years old and not really computer-driven.

We believe that e-commerce will allow us to increase automation, especially in the FX space. As this mass business is automated, it will no longer be stealing our time, allowing us to concentrate on strategy, research and consulting other areas of our company about their needs.

Floor:
Does the panel believe auto-pricing to be a necessity in today's e-FX market?

Torsten Kohrs: I think auto-dealing will become a necessity at the end of the day because it is not just a saving for the client. Just as one dealer at the client can ask multiple banks prices simultaneously, so a bank is receiving many more requests for quotes. Unless the bank is willing to use many more dealers, auto-pricing is a requirement.

Torsten Kohrs: I think both sides realise that benefits can be brought to the relationship through auto-dealing. It will be a benefit to the bank also to push the low margin business through auto-trading so that they can concentrate on the value added business such as options and strategy. The same can be said for the clients. I think auto-trading will deepen the relationship rather than loosen it.

Torsten Kohrs: Today I think the decision is not about what is the best system, but rather what system most meets a customer's needs. For a client that has just FX execution needs, a system that is free to them may be the best to go for. For a company like ourselves, we need a system that offers us much more functionality across multi-products, in a very structured manner, and has the ability to implement subsidiary dealing. So, yes, I agree there is room for two or maybe three systems.

Torsten Kohrs: I think I mentioned in my presentation that last month we did 94% of our volume over one platform, and on that platform we have seven banks, which is not obviously the number of banks we used to be dealing with. At the end of the day however, this business is customer-driven, and the banks will follow their important clients to a system.

Floor: On that question, banks are very customer driven I agree, but do you not feel that 360T is too German-centric for a bank with global reach? Are you going to take the decision that you will only trade with banks that are willing to join that system? I ask because banks do have to take in the interests of their wider client base and there are doubts that 360T has a broad enough reach.

Torsten Kohrs: I do not think we will add another portal because 360T is growing right now. We started in October with two banks and one corporate; we now have 10 banks and 12 corporates. As it expands, it will become more global and therefore more attractive to banks. Also I feel that a line has to be drawn somewhere, and if a bank is not on a system we are transacting such a huge percentage of our business through, they are unlikely to see much business full stop.

Floor: Do you think that the number of portals at the moment is still causing some clients to hold back from the decision to join a particular platform?

Torsten Kohrs: I think it's just a matter of time, that's all. Each portal continues to build links to the main treasury management systems and once that is achieved, they can spread their net wider. Once that is achieved, STP should not make a difference in choosing a portal, but currently I personally would make the decision on joining depending on whether the portal is offering a link to my TMS.

Floor: Different platforms have different pricing policies for their clients. What is the buy side's view of being charged what amounts to a brokerage for use of the system?

Torsten Kohrs: 360T charges to use the system, but it is a matter for negotiation. Given the efficiencies brought about by STP, most banks are happy to take the charge of dealing on the system, as they do on other systems. There is a terminal charge, and the buy side has to decide whether it wants to pay that or not, but as I said earlier, if we assume an advantage of one basis point by trading online, that warrants a terminal fee.

Floor: How soon do you envisage the e-channel being as secure as say, a system like EBS or Reuters?

Torsten Kohrs: We played a major role in the installation of security at 360T and I can guarantee that it is secure.

Floor: Torsten, you spoke of 360T not being a bank-backed venture. How important was that in your decision-making process?

Torsten Kohrs: The functionality was more important, the ownership less so, however I do think it is an advantage to have influence on the vendor to ensure customer needs are met first rather than the banks' - an example is 360T's transparent quoting process.

Floor: So when you talked about two or three platforms surviving, would transparent pricing being a consideration?

Torsten Kohrs: It would be a consideration, but we would not refuse to join a platform for that reason alone.