After a number of years having to take reactionary measures in
response to new regulatory requirements, panellists at Profit & Loss’ Forex Network New York conference expressed
enthusiasm for a new wave of innovation that has the potential to re-shape FX
“Perhaps for the first time in eight years, innovation is
back on the agenda,” said Jason Vitale, co-head of listed derivatives and
markets clearing EMEA and global head of FX prime brokerage at Deutsche Bank.
Vitale explained that he thinks of innovation in terms of
macro and micro changes.
On the macro side he said that Deutsche Bank is looking at
innovative technology applications in the prime brokerage and clearing space
covering pre and post-trade services. He mentioned their exploration includes
possible applications of distributed ledgers to pre and post-trade FX workflows
as well as “big data” analytics that can be applied to client
On the micro side, he said that the focus is on ways to make
improvements to both the transactional cost and capital footprints of the PB
service provision. Vitale noted that he sees a number of new service providers
launching FX post-trade services to assist sell side providers to find
efficiencies throughout the whole trade lifecycle.
“As an industry we’re in an exciting transitional period. We
all should feel fortunate to have a front row seat crafting the market of the
next 20 years,” he concluded.
Sanjay Madgavkar, global head of FX prime brokerage at Citi,
also cited distributed ledger technology as one of the new innovations on the
horizon that could bring benefits to FX prime brokerage.
“When you mention blockchain to people you generally get
some skepticism, but I actually think that the FXPB space is a good place for
distributed ledgers and all the benefits that potentially could come with it.
It’s a very interesting and applicable technology, I don’t know whether it’s
cost effective, but it would make our processes more robust,” he said.
Patrick Philpott, a director in Markit’s FX business, agreed that the topic of blockchain often
now induces a certain amount of skepticism from many market participants, but
also claimed that it is sparking innovative ideas.
“One of the benefits of blockchain is that it’s starting a
lot of conversations about finding new solutions to some of the challenges
facing this industry. Blockchain itself isn’t necessarily the solution, but it
could be things like self-processing transactions, which could be smart contracts
on the blockchain.
“There are a lot of technology changes going on both in the
banks and with the vendors. Markets are moving towards micro-services, looking
at virtualising services not at a hardware level but right down to a platform
level and a functional level.
“There is technology available now that lets you get to a
point where you can have virtualised services that are just put together to
process particular functions and to leverage this within a community-based
shared infrastructure model means that there’s massive cost savings available,”
The concept of shared infrastructure amongst banks is one
that has been garnering a lot of attention recently as more and more firms look
for new ways to reduce costs, particularly around processes that are
essentially utility functions.
The panelists discussed how much of the technology build at
the banks is usually held in commoditised services, such as back office
confirmations and affirmations, where they often use the same technology
provider. Now though, they said that there are a number of firms looking at
innovative ways – such as blockchain – to socialise some of these processes,
which one speaker claimed could “completely revolutionise” how the banks’ back
office systems work
Both Vitale and Madgavkar highlighted compression as another
area where they see significant potential for new innovations to improve their
“There’s so much scope to create innovative solutions around
compression,” said Madgavkar.
Dealer-to-dealer compression is creeping into FX and
compression for clients is currently being looked at. Indeed, Vitale
specifically mentioned the importance of industry collaboration to launch trade
FX client compression and aggregation services that could help optimise the
capital footprints for both clients and bank providers.
But it’s not just the banks and vendors that are exploring
new ways to improve their business processes. Craig LeVeille, executive
director, FX products, at CME Group, explained how the exchange is trying to
develop new solutions to anticipate changing client demands in response to
changing capital and margin requirements.
“We continue to look at ways to make our products as capital
efficient as possible and we recently cut our tick size, which has created
significant savings in execution costs for our clients. We also continue to
look at ways to provide easy to use products for clients looking for a cleared
solution. This has been an ongoing discussion but previously there was so much
uncertainty about the impact of regulation in FX that people were sitting on
the sidelines waiting to make their next moves,” he commented.
LeVeille said that he believes futures products will be the
most capital efficient FX product under the Basel III capital regime, but he
added that futures are just one solution amongst a number, with OTC compression
and OTC clearing being other viable ones.
“What we’re doing is working to develop tools that make our
products more compelling and anticipating client demands,” he said.
LeVeille also talked about some additional innovations that
CME Group is working on: “We’re introducing volatility quoted functionality in
our FX options. What makes this functionality interesting is that we are
building a triangulation capability that will link the volatility book with our
existing and rapidly growing premium quoted options book and the futures book
so there is an inner connectivity that should feed increased liquidity. These
may seem like simple innovations but they’re actually fairly significant and
help to improve the client experience.”
The legacy challenge
But despite the optimism displayed about the potential for
further innovations, the panelists conceded that it could be difficult to
migrate away from legacy technology systems towards some of the new solutions
Many of the large financial services firms have built and
developed workflows over a long period of time, creating a web of processes
that are all dependent upon other processes in the system. Therefore to make
significant changes to this can prove to be a challenging and expensive
Giving a vendor perspective on the issue of developing and
migrating to new technologies, Philpott explained that his firm has to maintain
its integration to firms’ legacy systems even if these firms start to migrate
towards some form of shared infrastructure platform and stressed that this
potential “re-writing” of FX systems and operations will not happen overnight.
“It has to be an evolution, not a revolution. Many of the
current systems have been built over a long period of time and so in most cases
and you can’t just run systems in parallel for a couple of months and then
switch one off. The replacement of these systems is also an integration
exercise, meaning that firms need to manage the legacy system and its
interaction with the new infrastructure while gradually moving functional
pieces from the former to the latter,” he said.