Swift is urging FX industry participants to collaborate further to increase automation levels in the global FX market. Bottlenecks, inefficiencies and manual processes could be eradicated through a “common approach and higher levels of automation”, says the global messaging cooperative.
In an information paper released in June, The value of standards in the FX markets, Swift identifies standards as a crucial element in boosting automation in the FX markets. Standards remove barriers to exchange, reduce costs, widen margins, expand opportunities and reduce risk. However, in the FX markets, standards are “not seen as the province of senior management in FX, even in operations”, says the paper. “Instead, they are regarded as technical adjustments to business processes, best left to software engineers. This means their contribution to lifting the commercial and financial performance of participants in the FX markets is consistently underestimated.”
Swift believes obstacles remain to prevent the FX market – which trades in 180 currencies in large volumes globally – from operating efficiently. According to the Bank for International Settlements’ Triennial Central Bank survey of FX and OTC derivatives markets in 2016 (the most recently available figure), trading in FX markets averaged $5.1 trillion per day in April 2016.
Given the size of the FX market and the number of currencies involved, it is not surprising that there is fragmentation. There is a diverse range of participants, including retail consumers, corporates, central banks, global, regional and local banks, non-bank liquidity providers, prime brokers, trading venues, matching platforms, buyside firms and fintechs.
There are still “plenty” of FX market participants that confirm trades by email, fax and telephone, the costs of which can be significant, says Swift. “A large bank active in a major market might have as many as 10,000 customers who do not confirm trades automatically. If each of those customers executes just two trades a week, that translates into 20,000 emails, faxes or telephone calls a week – in one country.”
The market would be “insupportable” without generous levels of automation, says Swift, and relies on technology platforms that can capture, confirm and settle trades without manual intervention. “Yet the sheer volume of transactions makes automation of FX trades particularly challenging. Once trades are captured, efficient settlement depends on prompt and accurate confirmation of the terms of the trade between the counterparties and of details of the accounts through which the trade will be settled. With millions of confirmation messages being exchanged every trading day, discrepancies in even one per cent translates into tens of thousands of potential settlement failures every day.”
Most FX trading and order management platforms, along with fintechs, have developed services that confirm FX trades with liquidity providers on behalf of users via Swift’s MT 300 messages. These services help lower-volume participants in the FX markets to automate confirmations, making it easier for higher-volume liquidity providers to do business with them. Swift says the use of MT 300 and MT 305 confirmation messages has grown steadily, to around 70-80 million a quarter between more than 10,000 direct and indirect counterparts, including corporates, investment managers and broker-dealers as well as banks. In FX spot transactions, forwards, non-deliverable forwards (NDFs), swaps and options, these message standards account for an estimated 75% of all confirmations issued.
While the messages have been adapted to meet new needs to accommodate new products such as non-deliverable forwards, “there are always new instruments, products and requirements in the FX markets.
“Message standards must adapt to these new and developing instruments, products and requirements, which reflect changes in the demands made by regulators as well as in the behaviour of market participants. Recent experience proves that the Category 3 Swift messages used by the FX industry – of which the MT 300 is the largest – are sufficiently versatile to be adapted,” says Swift.
A benefit of this versatility is to reduce the cost of adaptation to new requirements for FX market participants. Any participants already using the existing confirmation messages benefit from their enlarged capabilities without needing to invest in new technologies or in the reorganisation of existing processes and procedures.
Swift argues that the adaptations that have been made to the Category 3 messages prove that standards are not “technical adjustments or software malfunctions best handled by engineers but considered responses to demonstrable market needs”. Rather, they are the response to a formal process by which market participants make their needs known. “Provided they are willing to get involved, and to vote, any participant in the FX markets can initiate a change to a message standard. By that means, individuals active in the FX markets can influence the process by which message standards are adapted to new business needs or modified to better meet existing ones.”
Involvement of market participants is essential, says Swift. Juliette Kennel, head of securities and FX Markets, Swift, says: “While there is a high level of automation in FX markets already, the industry cannot be complacent and must work together to remove the remaining barriers to efficient exchange. Increased levels of automation through more and better use of standards will unlock higher operational, commercial and financial performance for all participants in the global FX market.
“Swift is adapting standards used in FX, in conjunction with industry, to lower the cost of doing business, increase returns on investment and reduce the levels of risk involved, but there is more to do. Industry must collaborate further to enhance standards by identifying the operational bottlenecks and barriers to great efficiency for all.”