“The biggest driver for the industry last year was regulation. It created a sea of change in the way that markets actually behave,” says Tod Van Name, global head of FX electronic trading at Bloomberg.
MiFID II was obviously the major piece of regulation driving this change in 2018, but although this regulation only applied to firms operating in Europe, Van Name says it caused a much broader push globally to raise market transparency, track trade details, and justify all of the decisions made around trade execution. While it represented a big lift for many multi-dealer platforms, this was especially acute for a firm like Bloomberg, which offers such a wide array of securities and instruments that trade across many asset classes and to a diverse range of client types.
“From our perspective, the initiative to launch a MiFID II compliant platform, for fixed income, required equity assets and certainly in FX, was by far one of the biggest initiatives that Bloomberg has ever done on the trading side. It was an unprecedented piece of work,” says Van Name.
Bloomberg launched its first FX Multilateral Trading Facility (MTF) in September 2017 in anticipation of the final launch of a MiFID II version in January 2018, but even following this there was more work to be done. For example, the venue is expected to capture all the trade information on the platform and report it to the relevant authorities. In this regard, FX is a little more complicated than other asset classes because there is so much pre-trade information, or what Van Name refers to as “event information”. A firm may ask for a variety of quotes from different counterparties, and all of that information has to be captured alongside the actual details of the trade itself. Then there are requirements around proving best execution, which means that orders need to be time stamped and, therefore, information needs to be collected regarding when the client asked for the order and when the price was sent, whether they dealt on that, priced or passed, etc.
“The need to capture and store all this information has had a huge impact on the data requirements of firms, I think in many cases it is almost bigger than the changes that were required for execution,” says Van Name.
With regards to the changes in execution requirements, Van Name stresses that as a result of new regulations, firms are under increasing pressure to explain and justify the decisions that they make in terms of how they manage their portfolio and execute trades.
That is why Bloomberg introduced a product called Sales Trader Workflow, which allows a sales trader at a bank to be able to interact with their client and then interact with their trading desk, get the liquidity for the client and pass that back. The whole process is time stamped, providing an order audit trail of all the information being passed back and forth.
“This has been a big hit, and not only with firms in the European Economic Area, but firms who recognise that this is just really smart practice. Best execution was a big focus for us last year,” says Van Name.
Another area of focus for Bloomberg was helping clients drive workflow efficiencies, as firms on both the buy and sell sides are under growing pressure to do more with fewer people, whilst simultaneously recognising that digitising their trading process can potentially reduce operational risk in addition to costs.
Having worked so hard to ensure that Bloomberg was ready for the MiFID II requirements, the fun part is that the firm will have to do the same all over again for Brexit now, says Van Name with a wry smile.
Aside from making sure that, assuming it still happens on March 29, the post-Brexit transition is smooth, Bloomberg will spend 2019 looking for more ways to add efficient workflows for clients, and not only within the FX space. This broader view is being taken because roughly 30-35% of the firms that trade on the FXGO platform are not FX-focused firms, but rather ones that need to hedge their exposure to other assets.
An example of driving workflow efficiencies for non-FX players was the tool that Bloomberg introduced last year that allows the subsidiaries of corporate treasuries to be able to pass their currency exposures up to a central treasury. In the past, letting regional branches manage their own currency operations proved to be extremely inefficient, because one branch might be buying in euros and the other selling euros when in reality each could be netted out and corporates ended up paying an unnecessary amount in brokerage and processing these trade.
“A lot of corporations have now adopted a central treasury profile, where they collect all of these exposures and then literally act like an asset manager. So we launched this platform that allows them to collect all those exposures and then the central treasury can net or aggregate those exposures, go into the market and trade them and then pass the executions back down to the subsidiaries using sophisticated account level mappings. This not only gives them a lower transaction cost in the marketplace, but it is extraordinarily efficient and minimises risk,” explains Van Name.