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Profit & Loss Supplement

On April 25, Profit & Loss held the fifth in its series of e-commerce seminars, “Adopting the e-Channel: The How’s and Why’s”, an event sponsored by Reuters and held at the City Conference Centre in London.

• What will motivate clients to migrate their businesses online?

• The e-Channel: Not just a replacement for the telephone

• Is true STP a myth?

• How to achieve end to end integration



Adopting The e-Channel: The How’s and Why’s

On April 25, Profit & Loss held the fifth in its series of e-commerce seminars, “Adopting the e-Channel: The How’s and Why’s”, an event sponsored by Reuters and held at the City Conference Centre in London.

Featured speakers represented a broad cross section of the FX industry from both sides of the market divide. The seminar examined what would motivate clients to trade online and whether true STP was a myth.

The seminar took place against a backdrop of the fallout from the Atriax closure, and the subsequent move of their main liquidity banks onto one or more of the other platforms, so delegates were given an early opportunity to discuss issues emanating from this.

The first panel of the seminar aimed to discuss not only what would motivate clients to move their business online, but also what was hindering migration, and included views from a major fund manager and a corporate treasury, as well as two leading sell side institutions. Panellists discussed the obvious benefits of efficiencies and streamlining, but also looked at the psychological side of the equation.

Panel two, in looking at true STP, noted the many different models of STP available, but also discussed the importance of integration with legacy systems, and whether the competitive advantage of STP is likely to last as the market continues to seek standards.

Following are excerpts taken from the panellists’ presentations and what proved to be very lively Q&A sessions with the full involvement of the floor.


Event Sponsor: Reuters

Reuters ( is the leading global provider of financial information, news and technology solutions to financial institutions, the media, businesses and individuals. Reuters’ strength is its unique ability to offer customers a combination of content, technology and connectivity. Its premier position is founded on continuous technological innovation and a reputation for speed, accuracy, integrity and impartiality. Reuters has over 19,000 staff in 97 countries, including some 2,500 editorial staff in 230 bureaux serving approximately 150 countries, making it the world’s largest international multimedia news agency.

Reuters has many different types of customer in the treasury market from FX and money market professionals in wholesale, retail and investment banks, brokerages and on FX and money market exchanges, in corporate, asset management and institutional treasuries, through to middle and back office professionals and organisations’ IT departments.

Reuters helps customers address the key treasury market challenges through its solutions for the front, middle and back office, utilising a unique combination of products and software services across transactions, content, financial applications and solutions. Reuters enables customers to capture order flows, manage risk and automate order processing in order to benefit from Straight-through Processing.


Panel One:

• What will motivate clients to migrate their businesses online?

• The e-Channel: Not just a replacement for the telephone

Stuart Peck, Global FX E-Commerce, CitiFX

I would like to start by posing the question, what motivates clients? At Citigroup we are focused on what the clients want. We can provide anything within reason, but if it is not what the client base wants, there is no point in us providing it. With this in mind, decisions we have reached recently have been heavily influenced by information that we have received from our clients. What this means, practically, is that our participation in our own proprietary system and in the multibank systems is very much driven by our customers.

So what motivates our clients to trade online? Very simply, ease of use, efficiency and price discovery. The avoidance of errors is also a motivation, and is an area that many tend to overlook. When dealing over the telephone there is an obvious risk of misunderstandings, things getting written down incorrectly, or booked incorrectly. By taking the bank sales desk out of the equation, and letting the customer execute the deal, the chances of an error are much reduced. The client also has an auditable and traceable flow of information from deal inception to settlement and confirmation, and much greater control of the process – it allows them to centralise their institution’s flows, which brings with it the possibility of netting benefits.

Of course, this topic is not only about what will motivate clients – it is important to discuss what will restrain client migration. Perhaps the biggest concern we have heard from our customer base is that of losing a relationship with the sales person due to online execution. We believe the key to answering this concern lies in the provision of a value added service, demonstrating to the client that with the vanilla FX flows re-directed to the execution platform of their choice, the relationship has more time to discuss strategic issues such as risk assessments and structured products.

Questions over reliability have also been a concern expressed by some clients, although I believe that over the past few years the reliability of everyone’s platform has increased significantly, and that this will continue to the point that reliability issues become virtually non-existent.

Migration can also be hindered by the cost of integration – although I believe this is being largely overcome now as the treasury management system providers and the single and multibank platforms have done a tremendous amount of work that we are now starting to see benefit the wider market.

A spin-off of this cost of integration issue is the demands of clients for bespoke functionality – something that is always a hot topic. Customers will always say, “This is exactly what we need – why can’t you deliver?” At Citigroup we always make our best effort to meet client demands; however, on occasions this is not possible. Sometimes there has to be a trade-off between what the client wants and what we can actually deliver. But whilst this is being arranged, migration can be held up.

Finally, and this is a proven issue, migration can be held up by the clients’ own software infrastructure which can be outdated.

Clients can be motivated through associated services. We are a multi-product organisation and can bundle lots of services together online, for instance linking our FX platform with custody services, securities and other asset classes.

There are also many efficiencies to be gained by the client from online trading. Customers can outsource part of their treasury function, such as the vanilla trades or subsidiary business. Treasury centralisation is something in which we have seen a huge growth in interest, and have several large customers who deal with their subsidiaries and either link those subsidiaries directly into us, or route their business through the central treasury function.

This offers a potentially very large cost reduction through increased efficiency. It is much easier and cheaper to deliver and transmit information around an organisation using e-commerce tools, and as standardisation of software and file formats approaches, this will become true in a multi-relationship environment.

Looking ahead, we see the big issues facing the industry being continued developments in reliability and price discovery, as well as improved integration of technology. The need is for more co-operation between treasury system vendors to allow the easy integration of ventures such as Continuous Linked Settlement. We also believe that while multibank platforms have gone a long way to providing a level of integration, the next stage for the sell side is to turn the dealing process from a three-click to a one-click operation.

Finally, the biggest motivator for clients looking to move online: STP. This is a dream for a lot of people in this room, and it is not necessarily a complete reality for many. Rapid advances have been made however, and I expect these to be accelerated in the near future.


Murray Gunn, Director of Currency Trading, Standard Life Investments

From an investment manager’s point of view, treasury e-commerce makes a great deal of sense. Standard Life is committed to e-commerce in the treasury space because we can see clear benefits that such a strategy can bring. We initially implemented e-commerce in our FX business, but we are very keen to develop it further to our money market operation to extend these benefits across our organisation.

There are three broad benefits for the investment manager using e-commerce: processing efficiency, regulation transparency and time management. Traditionally the treasury operation of an investment manager has been a very inefficient model, with a need for heavy human resources to execute and process very vanilla deals. This has meant a very time consuming and laborious process.

In a high volume business such as treasury, telephone-based dealing has meant that the chances of error – depending upon the quality of your people – have been high. Moreover, the fact that this is such a time-consuming process has led to a situation wherein the treasury function within most investment managers has remained solely execution only, this despite the fact that currency and money markets are two asset classes that are very important contributions to the overall return of portfolios.

E-commerce can solve many of these issues by dramatically reducing the chances of error and, crucially, giving treasury professionals more time to generate outflow for the portfolios by allowing them to generate better and more frequent trade ideas. As an example, we have found that office time spent on the high ticket volume execution of FX generated by equity and bond stock settlements can be cut by anything up to two hours per day using e-commerce. This represents a significant opportunity to add return to the portfolios that are being managed.

We have also found that dealer error rates are pretty much non-existent in the e-commerce environment. As long as there remains a manual element in the process – the keying of amounts for instance – there are still chances of errors; however, e-commerce also enables the imposition of certain parameters depending upon factors such as dealer or currency pair.

The vast majority of our $30 billion per annum FX turnover is generated by equity and bond settlements. By integrating our equity and bond order management systems with the e-FX platform, we can create a seamless process with very little manual intervention. This has in turn created an environment within which errors are almost non-existent. This means that in the e-FX world, the only errors should really be getting the direction of the currency move wrong – and if anybody can tell me how to eliminate these kinds of mistakes letely, I will certainly pay good money for it!

Whilst we have yet to achieve full STP integration with our treasury management system, we are very excited about the benefits such integration will bring in terms of greatly reduced keying errors. By reducing the amount of manual intervention needed from the treasury staff, you reduce the chances of the deal lifecycle breaking down. This, in turn, allows the treasury settlements area to become more efficient in matching and payments – in fact, the e-FX platforms are bringing competition to the existing matching services and challenging the status quo of the back office as well as the front office.

A major benefit for the investment manager brought about by the multibank platforms is that it has become much easier to prove best execution to the regulators. We are duty-bound to obtain the best price in every market we deal in, something that has been a grey area for a long time. Discussing what constitutes ‘best price’ is something that could fill a full day’s discussion, but suffice to say that – depending upon currency pair and amount of the deal – investment regulators want to know that we have at the very least obtained a better price than we could have elsewhere. This is much easier to prove in the e-commerce environment where the actual process of obtaining two or more quotes online is also much quicker than manual checking.

By utilising e-FX, we can now prove to our regulators that we execute at best price in greater than 75% of our deals. The other 25% are primarily made up of deals that are fixed orders, or in illiquid markets where we ask one bank and rely on price feeds to determine it’s a sensible, reasonable quote.

Developments in e-commerce mean that processing has become more efficient, regulation more transparent, and more resources have been put into adding value for portfolios. All in all, it provides a win-win solution for the investment manager.

As for the industry as a whole, I believe that increased efficiencies will slowly but surely change the mix of deal flow that comes from investment managers. The need for deal flow to fund equity and bond settlements will always be required, but more and more deals will be profit related – that means more deal flow will be governed by the profit motive rather than the requirement to settle other asset class deals than is currently the case.

These trends, allied to the growing interest in currency overlay, can only be good for the industry-wide deal volume in the future. E-FX and e-commerce are here to stay, and that is good news for all in the FX and treasury industry.


Elena Theodorou, E-Commerce Sales, JP Morgan

We have already heard a great deal of answers to the question posed today, and essentially the answer does lie in the efficiencies that e-commerce can bring. By migrating business online we can streamline and automate the entire trade cycle, often re-designing it. By removing redundant and archaic processes we can improve upon the current structure, and eliminate the error aspect of the trade process as well as remove a lot of the assessment risk.

Put together, this means that firms on both sides of the market can achieve rapid and sustainable improvement to their current cost structure and their financial performance, thus providing a more efficient use of capital. It will also allow traders to concentrate on other areas of core competency.

We believe that e-trading is not just about replacing the telephone. The Web can be used to deliver a suite of tools to assist in every aspect of the trade cycle, not only for FX, but also for the pricing of options, bonds and other asset classes.

E-commerce is essentially about giving clients real time intelligence and improving on their current processes – streamlining their operations and saving them time. It is also about offering clients services in the pre-trade, such as 24-hour research, the ability to access market data, analyse portfolios and import facilities from their order management system into the trading application.

In the trade environment it means offering them fast, competitive and automated real time pricing, and then pulling that into the post-trade environment for confirmation and settlement.

We regard the Web as a complementary tool to improve market and product transparency, as well as enhance productivity on both sides of the market. We feel it important to work with our clients to create bespoke solutions, as well as to offer our own proprietary solutions and multibank solutions.

The Web is also a great medium to alert clients to new products available and to train them through the provision of simple training tools.

One of the compelling arguments for clients to migrate online is of course increased efficiency. This leads to a reduction in risks by shortening the settlement cycle which in turn is achieved by the earlier receipt of information and the reduced level of foul trades. It is no great secret that a lot of money is lost every year due to foul trades, but now these deals can be rectified before they cost money. The entire industry is facing tightening margins, reducing foul trades mitigates these pressures somewhat.

Clients also benefit from improved reporting and increased security brought about by e-channels. Currently clients call in on the telephone to execute trades, and whilst we generally know the people that call in, on an e-platform the security brought about by the use of passwords and proprietary systems means there is a greater confidence with whom we are actually trading.

Ultimately, clients will migrate online because of the aforementioned benefits of automation and the value added services their banks can provide. For the banks themselves, e-systems allow them to monitor their own performance, which in turn means they can continue to improve their offerings to clients by maintaining effectiveness and efficiency.


Torsten Kohrs, Treasury, Lufthansa

I would like to give you a flavour of what we do at Lufthansa, and our experience in the online space. We are separated into two teams – a liquidity and interest rate management team, and a money market team. Last year’s volume in money markets was about 73 billion euros; our FX volume was around 40 billion euros in absolute cross terms.

We started trading online in May 1999, when we installed Dresdner Bank’s Piranha system. Technically, this is the platform which now forms the basis of FXall, only it has multibank capabilities. In July 2000, 360T introduced us to the idea of a multilateral system that effectively covered all treasury instruments in which a corporate would deal.

We liked the idea and the company raising the idea, so we signed a letter of intent with 360T, and assumed a pilot role with conceptual support. After quite a number of meetings and beta testing, we transacted our first FX deal in October 2001. We followed by transacting our first money market deal in January 2002, and extended this to trading interest rate derivatives, swaps and FRAs, in March 2002. We can now say that for the last month [March], 94% of our FX volume has been transacted on 360T.

What is still to come on 360T is the inter-company dealing module and commercial paper. Testing on the commercial paper module was started two weeks ago and we expect this to go live in six weeks.

There are two modules on 360T. One is TEX, a multi-dealer system for external trades between corporates and banks. This works just like any other portal: we enter a trade, send it out, get the quotes, transact, and the deal is done. A very nice feature of the system – which is unique to 360T – is that all the banks participating in the quote can see the prices of their competitors. This means they are entering something of an auction.

The other module, which is about to be installed, is ITEX, which is the inter-company dealing system. We will have four of our subsidiaries on this platform; they will be able to deal directly with us. A feature of this is that the two systems are connected, so that a subsidiary – within limits – will be able to deal directly with the bank, without either party knowing. The subsidiary will only receive the best quote, and will be able to transact on that. Two deals will be established, one between the subsidiary and central treasury, the other between central treasury and bank.

The two trades will go straight into our treasury management system, GTM, and will be processed straight though to the back office for payment and for confirmation. That is STP.

So what is the benefit we have seen so far? The workload reduction we estimate at a conservative 50%; however, I would suggest it is 60 or even 70%. We reduced the number of dealers we use to execute business. We call at least two or three banks per deal, and now one dealer – working with the system – can fulfil the task of three or more. That means an optimisation of resource allocation, and those dealers no longer executing are now able to concentrate on strategy.

We have also seen the benefits of STP in a much-reduced error rate. We estimate a price advantage from the system of about one basis point in FX which we have on an annual basis. This means a 400,000 euro saving per annum. Other benefits include the availability of real time market data in all products, to our subsidiaries.

So, why 360T? For us the key was the variety of instruments. We believe that 360T, with their system, are the current technology leaders. We also like the transparency of pricing to the banks – it’s not only that it’s auction-like. Banks may improve their prices when they see they are outside the top five prices, and it is also a way to show banks where they stand with their competition. We also find that because it is a small team, 360T is very flexible to client needs.

I spoke to our dealers recently, specifically about the system, and they stressed it was easy to use – it is also worth noting that two of our traders are over 60 years old and not really computer-driven.

We believe that e-commerce will allow us to increase automation, especially in the FX space. As this mass business is automated, it will no longer be stealing our time, allowing us to concentrate on strategy, research and consulting other areas of our company about their needs.


Q&A: Panel One


Recent moves have resulted in the leading liquidity providing banks providing liquidity on most of the portals. Previously, a client wising to trade online could at least have followed the majority of its relationship banks to a portal – now it has to pick a portal. What will drive them to make this choice, and have these moves made their choice more difficult than it might otherwise have been?

Murray Gunn (Standard Life)

We were trading with Atriax [which had just closed] and we are currently looking at other platforms ahead of making our choice. For us the criteria have always been about functionality, cost and, I suppose, we must now think about the financial structure of the portals.

What we have seen with Atriax was that when the going gets tough – and there has been a downturn in the market obviously – people with balance sheet decisions to make, make those decisions with their own interests in mind, which is fair enough. I think, however, that what we have to look at now is, can a situation occur whereby if whoever owns the platform decides that they no longer wish to back it, that it will mean the end of the platform?

In regard to that, you have three different models to look at. FXall is owned by multiple banks, FX Connect is State Street backed, and Currenex is independent. Ultimately though, functionality is an issue – there are a couple of things on the management reporting side that may be differentiators – and so is cost.

Stuart Peck (CitiFX)

I think the functionality is very important with most of the liquidity providers on multiple platforms now. It is important the customer chooses what they feel is going to function up to the standards they require. The different products available currently have different functionality so at least the customer has assistance in making their choice. In the past, customers have held off waiting for consolidation as well as functionality, but if there is an optimum time to choose a portal, I think we are close to it.


Does the panel believe auto-pricing to be a necessity in today’s e-FX market?

Torsten Kohrs (Lufthansa)

I think auto-dealing will become a necessity at the end of the day because it is not just a saving for the client. Just as one dealer at the client can ask multiple banks prices simultaneously, so a bank is receiving many more requests for quotes. Unless the bank is willing to use many more dealers, auto-pricing is a requirement.


The benefits of auto-pricing to a company like ours are clear. We handle very many transactions in an average day and whilst the time saved by auto-pricing – around 10-15 seconds – does not sound much, taken over a longer period it equates to a good efficiency gain in terms of time saved.


If clients are going to take up auto-pricing, where does this leave the bank/client relationship?


I think both sides realise that benefits can be brought to the relationship through auto-dealing. It will be a benefit to the bank also to push the low margin business through auto-trading so that they can concentrate on the value added business such as options and strategy. The same can be said for the clients. I think auto-trading will deepen the relationship rather than loosen it.

Moderator, Robin Poynder (HSBC)

I think it also largely depends on the client. Clearly there are different types of clients, and it must not be forgotten that there are also many clients that do not have high volume business. They are not necessarily interested in auto-trading, but they are still interested in e-FX and the efficiencies this can bring. An institution needs to be flexible in its offering to its client base.


I think it important as well to remember that this subject is not just based around the multibank environment. I think there is still a lot of space for the individual banks to provide their customers with their own proprietary dealing tools. That has to be part of a flexible offering.


I agree, looking down the chain, we are hearing a lot more talk of adoption this year compared to last year and a big reason for this is probably psychological. Last year you could point to 92% of clients saying they wanted to deal online but were unlikely to in the next six months. They were probably influenced to some degree by stories in the mainstream press highlighting security issues. This year the press is a lot more positive, therefore clients are seeing technology working which is encouraging them to adopt.


Do e-channels favour the globally brave or are they a tool to reset the playing field across all segments of banks?


Larger banks tend to have led the way because they have been able to invest the necessary money – and it has cost a lot to get it going. Clearly, however, medium and small sized banks can now take advantage of that work by buying an off-the-shelf system. Of course they have to pay for it, but they do not have the R&D costs associated with developing a system from scratch.

At the end of the day it comes down to a business decision over whether you have the volume to justify the cost. E-commerce does level the playing field, but ultimately e-commerce supports existing business so the strongest will always rise to the top.


What number of multibank systems does the panel feel appropriate?


I think it depends on where our banks are trading. Historically we have not chosen our banking relationships from an e-commerce perspective, but it obviously

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