14 December 2017
Matthew Hill

New paradigm for FX post trade

Matthew Hill - Markit

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FX markets ready for new post trade paradigm

14 July 2015  |  2688 views  |  0

Shockwaves following the trading scandals and the fallout from the Swiss Franc / Euro decoupling are reminders of the need for evolution in foreign exchange markets.  Compliance and communication are areas ripe for change.  As market participants work to improve controls and minimise operational risk, a new paradigm for FX post trade infrastructure must be part of the solution if the industry is to achieve its goals.


Imagine if post trade processes in the FX derivatives markets were optimized.  Managing trade lifecycle events such as the expiry of options would be simple and standardized.  Communication would be seamless and auditable.  There would be no question that your counterparty’s view of a trade was the same as yours.  Disputes over trade economics or miscommunications would be a thing of the past.  With a new paradigm the industry can reduce risks, lower costs and put an end to unnecessary administrative work that consumes time and resources. 


Reducing fragmentation and complexity is how the industry begins to improve its operations.  Today’s platforms and processes were developed at a time when there was less focus on costs and market participants had a preference for self-build.  Fast forward more than a decade and we have a proliferation of individual, unconnected systems.  The challenge is exacerbated by the changing face of the FX market.  With dealers now accounting for less than 40 per cent of trade volume, the influx of investment managers brings yet more process fragmentation to the market. 


A modern design for FX post trade focuses on efficiencies gained by centralising key processes via a unified network and automating post trade workflow.  To start, creating shared access to trade confirmations and accurate, auditable trade records, simplifies the management of trade lifecycle events and reduces the likelihood of errors and omissions. 


The credit, interest rate and equity derivatives markets have benefited from the use of centralised solutions for more than 10 years.  The widespread adoption of electronic trade confirmation for interest rate swaps, for example, enabled those markets to manage growth (the rates market expanded 87% from 2010 to 2014) and adapt to clearing and reporting requirements post Dodd-Frank.


While the FX market is making inroads, for example the embrace of CLS, it needs to focus on the activities that lie between trade execution and settlement.  A new paradigm will help market participants become more agile, reduce operational risk and prepare for regulatory change. 


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