The e-commerce clamor of 2000 seems a distant echo, but the forces for change in the wholesale financial markets continue to move forward. There are significant changes in the way that the financial markets and their participants are communicating. These changes are affecting us all – traders in the banks, IT groups in the financial institutions, treasurers in the corporate world and the software vendors servicing them.
Historically, foreign exchange and money market trades were executed bilaterally by phone, through a broker or across a trading or matching system within a private network. Recently, banks and their clients have begun using online exchanges. The exchanges take many forms – from single product and bank to multi-bank and multi-product and combinations of both. Price transparency and liquidity attract users to single product or bank portals while multi-product and multi-provider based ventures offer greater scope for complex financial engineering. The markets will decide which will survive in the future, although being first to market with the ability to maintain a consistent level of development will be key to survival and subsequent growth.
Transactions executed on online exchanges are typically passed to an outsourcing service provider (OSP). We are likely to see such organizations expand into the risk management space as well as the emergence of new risk management service providers. Already, such providers are evolving in a small way to offer FAS 133 hedge analytics services. This trend is likely to develop into a wider and deeper set of solutions.
Settlement gateways and networks have traditionally been closely guarded for good reason. However, we are starting to see utilities offering secure access to international payment and settlement systems. Organizations driving this agenda forward include the London Clearing House (LCH), Eurex Clearing and the Board of Trade Clearing Corporation as well as new entrants such as CapClear, NexClear and onExchange. The arrival of new providers like Radianz in the secure network space is creating a more accessible environment for service providers. These initiatives are at various stages of operation today – some are still in development while others are already live.
Recent world events and concerns over global security are also having an impact on the financial markets and increasing the focus on cost. Firms need to reduce costs, make them more flexible and better aligned to the changes in their business. But, at the same time, there is also a focus on security, demanding better resilience, better disaster recovery and an increased investment in technology and facilities. A solution to this seeming dichotomy might be for firms to consider outsourcing all or part of their operations and infrastructure. Several OSPs are starting to emerge, enabling a variable, per transaction, pricing methodology to be achieved within a resilient high-availability operation. Settlement Operations Clearing eXchange (SOCX), a joint venture between Deutsche Bank and Wall Street Systems, is a notable new entrant to the OSP space.
How are these changes affecting traders, treasurers and IT staff? Increased complexity in methods of execution, operational services, risk management and settlements have implications for all financial markets participants.
Traders are familiarising themselves with as much new technology as possible and are increasingly viewing the new channels of customer interaction as possibilities rather than threats. From a technology perspective, cross product, real-time solutions with multiple integration points, as well as more complex workflow tools are needed. Banking technologists need to manage relationships with multiple third party service providers through detailed service level agreements and legal contracts.
Corporate treasurers, will need to manage this complex roadmap of services with careful planning and direction to identify the solutions offering most value to the firm over the long term.
Software vendors need to continue integrating their software with the exchanges, so that users can benefit from price discovery, quotations and post trade capture. They should offer secure integration at multiple points in their application and be ready to combine their data with external data so that they can deliver a holistic picture to the client. This should occur globally, in real-time, as there are no longer any borders in this new interconnected world. It should also be offered across all products because the barriers separating different financial instruments have largely disappeared. This will be a challenge for many vendors; let the buyer beware.
Is this additional complexity good? If it achieves better price transparency, increased liquidity, higher service levels, better, more flexible cost models, reduced cost per transaction and more secure robust operational solutions, yes. Watch this space.