The FX market currently looks like the ultimate mismatch. Front office processes have been transformed to accommodate the realities of electronic trading – operations and credit haven’t. This is acting as a drag on FX liquidity, as well as imposing an enormous cost burden: ~£20bn per year for the top global investment banks and buy-side institutions. Fortunately, as Anoushka Rayner, Global Head of Sales and Business Development at Cobalt explains, there is a simple and readily achievable remedy: centralised standardisation.
The FX market has a proven track record for acting on its own initiative to ensure that trading is always orderly and unnecessary risks are curtailed, with the creation of CLS an obvious example. There is now a pressing need for it to act in similar fashion to address the issues of post-trade processing and credit management.
The FX front office has evolved to accommodate the shift from a voice brokered market – resulting in transparency, efficiency, liquidity and consistency – by bringing counterparties together so they can interact more effectively. In doing so, all participants have benefited from lower frictional costs and greater transparency.
Sadly, the same cannot be said of FX post-trade processing, which still uses much of the same basic infrastructure it used to support voice broking. In two decades, it has remained essentially unchanged, resulting in legacy processes/practices that are wholly unsuited to supporting electronic trading as conducted in today’s FX front offices. These processes/practices are also excessively costly, to the extent that post-trade costs can now even exceed the potential profit from the execution of a trade.
At the core of the problem are the fragmentation, replication and complexity of internal processes. This is hardly surprising given that at least 23 services are usually involved in managing current FX post-trade activities, which inflates both costs and operational risks. Multiple vendors are needed, as are multiple copies of the same trade (20+ is not untypical). At the same time, existing legacy processing technology cannot keep up with market evolution and so requires additional outlay to pay for the manual processes needed to cover its shortcomings.
In some cases, extremely costly processes persist. These could be dispensed with altogether in a more efficient processing environment. A case in point are confirmations, the costs of which at some top tier FX banks – just for their EB and PB businesses alone – run to nearly USD5mn per year.
Attempts to respond to changes in the front office by changing post-trade methods have also made the situation worse, as new substandard processes are layered on top of an already fragile and inefficient process stack. Each new process added therefore effectively exacerbates an already suboptimal process flow, in terms of both cost and risk.
These issues apply across all FX-related instruments, which when one considers that volume in uncleared FX derivatives (a market approximately twice the size of spot) totaled ~USD88trn at 2018-year end, illustrates the sheer magnitude of the problem. In fact, for FX derivatives, the risks and costs of these operational limitations are even more acute, as the processes involved are more complex than for spot.
These issues are collectively hampering the FX market’s overall efficiency and growth. This applies across bank to client, bank to bank and prime brokerage segments. In some cases, it is already causing market distortion, such as driving participants to review their position in FX prime brokerage. Given the FX market’s established reputation for resolving structural issues of this nature, it should be possible to find a solution internally, rather than directly involving external bodies, such as regulators.
A related area that is also creating unnecessary cost and risk – as well as damping liquidity growth – is credit management. Given the large trading volumes now conducted via API and at high frequency, FX is probably the market least tolerant of latency. Yet despite this, antiquated and fragmented credit management processes still persist, causing significant practical problems. Workaround remedies have emerged in an attempt to address these but create different problems instead. Credit kill switches are a case in point, because they can create disputes when clients find themselves having to reduce positions at unfavourable prices and also requiring a manual unwinding process, exposing both clients and banks to further issues.
Credit-related risks, such as over-commitment, still remain stubbornly high, while workaround remedies actually reduce credit efficiency, such as over-allocating to accommodate localised management of credit within venues. Costs are also an issue in credit management, with top tier banks spending considerable amounts unnecessarily on redundant/inefficient credit processes and technology.
The good news is that a solution is already entirely achievable at technical level. The obvious remedy is a single centralised shared ledger platform using standardised data that can handle all the necessary post-trade activities (plus credit) in one solution. It would mean that compliance with many of the principles in the GFXC’s FX Global Code of Conduct could become an achievable and immediate reality rather than merely being aspirational. A case in point is the principle relating to real time monitoring of trading permissions and credit provision
A centralised industry shared ledger platform would deliver multiple practical benefits across the market place. The most obvious would be to eliminate duplication and cost saving. Instead of running multiple versions of inadequate processes, participants could handle trades using a single set of consistent industry-standard processes. In the long term this could deliver cost savings of up to 80%, with ~50% possible in the medium term.
An additional benefit is cost transparency. In the current environment, with the accumulation of multiple layers of legacy operations and credit technology/processes, it is often extremely difficult to determine the post-trade cost of a transaction. A central standardised process would by contrast make the measurement and monitoring of post-trade costs straightforward and potentially deliver the same degree of transparency as already available for FX execution costs.
This shared ledger approach would also deliver various credit management benefits. For instance, the availability of near real time credit data would enable more efficient credit processes, such as:
- Preventing erroneous credit cut-offs (thus improving client relations)
- Making more efficient use of available lines
- Avoiding over-commitment risks
- Alleviating balance sheet pressure
Centralising credit management using a shared ledger enables more dynamic control across all types of trading relationship (bilateral, tri party and quadri party). This will dispense with the need for over-allocation and rebalancing in order to accommodate localised management of credit within venues. Those issuing credit will also be taking control of it (as is the case in equity markets) and will therefore be able to recycle it back into the market in the most efficient manner (a key consideration for non-CLS currencies and non-CLS members). Ultimately this will result in venues receiving business because they offer the best price, not because there is residual credit left at them.
In operational terms, workloads will also reduce when using this sort of solution, as less remediation will be required. Efficient credit management and automated processing will drive a reduction in failed trades, thereby also reducing the need for manual intervention and repair.
Liquidity and Regulation
The cost and efficiency benefits delivered by a centralised industry shared ledger platform have important implications for liquidity and market participation. Trading volumes in G7 pairs have been declining in recent years for a variety of reasons, but operational/credit inefficiencies are clearly playing some part if they are cutting trade margins to near zero.
If individual ticket processing costs decline significantly, then logically this will boost existing participants’ willingness to trade, both in general, but also potentially in smaller transaction sizes. By the same token, new participants may be encouraged to join the market once they can see that the processing cost burden and operational risks have been alleviated.
Finally, there are also prospective regulatory advantages to the FX market adopting a centralised shared ledger solution. Some regulators are already clearly aware of the issues, as shown by the FCA and BoE’s convening of a ‘Technology Working Group’ to reform post-trade processing so as to reduce complexity, encourage innovation, and improve systemic resilience. A shared ledger platform could support this initiative in various ways, but one of the most obvious is with regulatory filings.
At present, participants (often using manually intensive processes) incur substantial costs collecting trade data and submitting it to regulators. Market-wide adoption of a shared ledger solution would instead make it possible for participants to submit regulatory filings far more easily, plus do so in a consistent format. This would enable better monitoring of any potential systemic risks, plus delivering lower regulatory costs for all concerned (including regulators). Central banks could send a strong message here by adopting a shared ledger solution for their own trading activities, which would also serve as a clear signal to the organisations they regulate.
Adopting a single centralised utility for FX post-trade functions based on a common data standard ticks numerous boxes for all market participants. These include considerable cost savings, reduced credit/operational risks and better use of balance sheet, which in turn also facilitate greater trading activity and more diverse participation, as well as enhanced price discovery and lower regulatory overheads. Finally, it will also reinforce the FX industry’s existing reputation for innovating in the common interests of all market participants.
Cobalt, the foreign exchange (FX) infrastructure based on shared ledger and high performance technology, has hired five experienced professionals to lead its drive to re-engineer the FX market.
Post-trade FX is currently riddled with complex legacy systems and manual processes, creating unnecessary cost and risk across the market. The new hires bring a wealth of FX experience to the company and will play an important role in the rollout of Cobalt’s shared infrastructure which optimises risk management and slashes cost by up to 80%.
Bob Linton, based in New York, has become head of connectivity and onboarding at Cobalt. He will be responsible for replacing old, legacy technology incumbent in many institutions’ post-trade FX operations with Cobalt’s low latency, high performance shared ledger technology. He joins following a 13-year stint at market infrastructure technology provider, Traiana.
Dan Evans was appointed product analytics lead and is focused on product innovation and reporting as well as highlighting the hidden opportunities for financial institutions. Dan is experienced in analysing FX trading data both as a director of FX trading at UBS, where he spent seven years, and as the director of his own consultancy.
John Fitzgerald joins as information security manager. John has over 15 years in risk and security management and prior to joining Cobalt, he was the lead for information security at Rathbone Brothers Plc.
Nitin Talway has been appointed head of support. He has over 13 years’ experience in the FX industry having previously worked for institutions including Bank of America Merrill Lynch, RBS/Natwest Markets and Credit Suisse.
Kameldeep Bhachu is now a senior business analyst at Cobalt. He previously worked at Murex and in the FX and treasury divisions at Morgan Stanley, UBS and Royal Bank of Canada. He brings extensive front to back knowledge of the FX cash and derivatives business.
Darren Coote, managing director of Cobalt, commented: “We are thrilled to welcome Bob, Dan, John, Nitin and Kameldeep to the rapidly expanding Cobalt team. They bring a breadth of FX experience across the interdealer and prime broker space and have an intimate knowledge of the competitive landscape as well as financial institutions’ systems. Each will play a key role in reengineering the FX market from the ground up, getting rid of legacy systems and replacing them with new technology which is more suitable for the low-latency FX market of today.”
The foreign exchange (FX) industry is now emerging from a difficult period of scandal. Following the resulting increased scrutiny, which culminated in the creation of the FX Global Code, the global USD5 trillion-a-day market finds itself at a crossroads.
The Code’s efficacy is yet to be tested, but adoption continues and is strong. Why does any of this matter? Well for one, foreign exchange remains the world’s largest and most liquid market and plays a critical role in enabling international trade and investment.
Currencies provide a bell-weather for economic health, and short-term sentiment and speculation of course, but also a tool for hedging and the genuine flow of business and goods across borders.
Trust in its operation has to be restored, not just for investors but for the broader reputations of the institutions with FX operations.
A handful of banks, and non-bank trading firms – still mistakenly referred to as “the buy-side” – now dominate FX completely. This concentration was built over two decades and these global franchises have also been the first to adopt new technology and models, from prime brokerage to really maxing out on their API trading strategies.
A common muttering on FX street is that the banks have been distracted by regulation, paving the way for non-banks to steal clients from underneath the noses of the banks. Fair comment or sour grapes?
Meanwhile, in the post-trade space, there is a growing consensus for a shake-up of the current model, which is expensive and outdated. Demands for instant settlement continue to grow and more participants are backing DLT/blockchain-based platforms.
Many of the post-trade giants of today were established more than 20 years ago, as is their technology, so there is certainly scope for disruption. New entrants such as Cobalt are shaking up the post-trade FX landscape, while incumbents sensing their dominant position under threat, are eyeing the roll-out of DLT-based systems and – in some cases – investing in start-up systems.
The move towards automation and straight-through processing began many years ago. Lower costs generally translate into lower barriers to entry, and we have already seen new entrant establish themselves as key market players. This will gather pace and will open the door to a new wave of market players to enter the FX market.
We would most certainly not bet against the blockchain, despite the inevitable kickback to the hype cycle. Cloud computing went through a hype cycle and subsequent trough of disillusionment before becoming a ubiquitous part of the IT landscape on what Gartner calls the slope of enlightenment.
The past is the key to the future of FX. The winners will continue to innovate using technology and will meet the challenges of adopting big data and analytics, distributed ledger technology, cloud computing, robotics and artificial intelligence (AI) head on.
Cobalt, the foreign exchange (FX) post-trade processing network based on shared infrastructure and high performance technology, has appointed FX specialist Anoushka Rayner as global head of sales and business development.
Anoushka brings over 20 years of experience in the FX industry to Cobalt. She has held a number of high-profile roles, most recently as business manager and global FX sales specialist at Traiana. Prior to this she worked as sales director at smartTrade Technologies and as global head of FX option sales at FXCMPro, the institutional arm of Forex Capital Markets.
Anoushka will be responsible for managing Cobalt’s commercial relationships and will play a key role in scaling up the business as it gets ready for its launch later this year.
Darren Coote, Managing Director of Cobalt, commented: “We are very pleased to welcome Anoushka to our ranks as we work towards reengineering the largest and most liquid financial market in the world. She brings a wealth of experience and contacts to Cobalt and is a key part of our plans as we prepare to launch later this year.”
Anoushka Rayner said: “Current post-trade FX service providers and infrastructure are shackled by legacy technology and inefficient processes which are unfit for purpose. This increases costs for market participants and poses significant operational and systemic risk to the FX market.
“I’m excited to be working for Cobalt as I believe it poses the single biggest innovation to post-trade FX in the last 15 years and look forward to playing my part in creating a shared infrastructure which will benefit the entire market.”
Cobalt, the foreign exchange (FX) post-trade processing network based on shared infrastructure and high-performance technology, has appointed FX industry veteran Darren Coote as managing director.
Darren has been working with Cobalt since the end of 2017 as a strategic advisor and will now take on responsibility for the day to day management of the company. This comes at a key time for Cobalt as the company launches and looks to significantly scale its business.
Darren brings over 25 years’ experience in FX to Cobalt, having held a number of high profile roles running global FX trading and e-FX businesses at UBS where he drove the business through significant industry and technology change. He has also worked for Lloyds, served on a number of FX boards and committees including the Bank of England’s FX Joint Standing Committee and EBS’s executive board prior to the company’s sale to ICAP in 2006.
Adrian Patten, Co-Founder, and Chairman of Cobalt, commented: “We are very pleased to welcome Darren to our fast-growing team. He brings invaluable expertise and market contacts. We are confident he is the right person to lead Cobalt as we prepare to go into full production later this year.”
Darren Coote said: “Having worked in FX for over 25 years, I have seen first-hand the negative impact that aging, inefficient legacy technology is having on market participants and their bottom line. As the industry gets increasingly competitive and margins shrink, it’s important for institutions to save money and mitigate risk wherever possible.
“Cobalt is a unique solution which solves an urgent need for participants by creating a shared FX post-trade back office utility, significantly reducing risk and cost by 80%. I’m excited to play a key role in Cobalt’s development as we prepare to go live this year and re-engineer the FX market from the ground up.”
This May, Cobalt secured a strategic investment from Singapore Exchange (SGX), which operates Asia’s largest, most diverse and fastest growing FX exchange.
BusinessCloud has revealed its list of the top 101 fintech disrupters in the UK, and it made for pleasant reading at Chatsworth Towers.
The award recognises companies that are disrupting the industry through technology – whether they are heavyweight incumbents to start-ups. BusinessCloud also canvassed the opinion of industry experts before they settled on the final line-up, and we’re delighted that two of our clients made the list.
One of those is Previse, a startup that applies machine learning technology to solve a global business problem – slow B2B payments. The London-based fintech enables buyers to have all their suppliers paid instantly, as soon as the buyer receives an invoice. It uses machine learning to root out the invoices which may not be paid, allowing a funder to pay the rest immediately.
Previse has made huge strides since its launch in 2016, recently raising £7 million in Series A funding. The startup has also received backing from leading business figures and top venture capital firms and has signed up seven large organisations. With strong plans for growth, the company is undoubtedly one of the hottest fintechs worth keeping an eye on over the next few years.
Another of Chatsworth’s clients named in the list is Cobalt, a foreign exchange (FX) post-trade processing network based on shared infrastructure and high-performance technology. Cobalt’s unique solution leverages highly optimised technology alongside an in-house immutability service based on distributed ledger technology (DLT) to deliver a shared back and middle office infrastructure that is scalable, secure and fast.
By creating a shared view of trade data, Cobalt frees up back and middle office resources from multiple layers of reconciliation; creating a ‘golden’ portfolio of FX transactions from which to provide multiple services.
In May, Cobalt secured a strategic investment from Singapore Exchange (SGX), which operates Asia’s largest, most diverse and fastest growing FX exchange.
It’s great to see startups such as Previse and Cobalt be recognized for shaking up the status quo in their respective industries.
As the original fintech PR company, we can say with confidence that there isn’t a more disruptive sector than fintech. It has finally come of age and made it into the US-run Merriam Webster online dictionary – perhaps fitting, considering the shared digital origins!
Leading industry trade publication FX Week has announced the winners of its prestigious e-FX Awards, which included two of Chatsworth’s foreign exchange clients.
The awards recognise firms from across the foreign exchange industry for their excellence and innovation in the world’s most liquid financial market.
Announcing the award winners, FX Week editor Eva Szalay said technology in the market was “booming”, pointing out that “innovation has been extended to small start-ups, as well as the largest players” and highlighted the market’s “genuine desire to become more transparent, more competent and highly innovative”.
Innovation was certainly in evidence from algorithmic trading technology provider Pragma Securities, which was named Best independent algorithmic trading technology provider, and post-trade distributed ledger technology company Cobalt, which was awarded e-FX initiative of the year award.
Reflecting on the increasing sophistication amongst the buy-side and the push for best execution in FX, Pragma has seen rapid growth and expansion over the past 12 months.
The company serves banks, brokers and sophisticated buy-side institutions, and identifies its value proposition around transparency and control as differentiating features.
It added a number of new capabilities to its Pragma360 algorithmic trading platform. This includes algorithmic trading non-deliverable forwards (NDFs), which offers traders better execution when investing in popular emerging market currencies.
It has also expanded its international client base through a new connectivity presence at Equinix’s LD6 data centre in London, providing lower latency connection to London based FX matching engines.
Cobalt has a very eye-catching proposition – it uses distributed ledger technology to cut 80% of the costs of post-trade reporting.
Founded by former Traiana executive Andy Coyne, and Adrian Patten, the company is offering to completely revolutionise the costly and time-consuming way in which post-trade FX services are conducted, cutting out duplication by storing records of all transactions on a single distributed ledger.
“I think if we are successful, the biggest impact will be on trading and Cobalt will increase volumes. Post-trade costs are a tax on trading and the idea that you can charge someone 50 cents to a buck for sending an unencrypted message to the back office is ridiculous.
“So if we can reduce those costs by dollars per transaction, that will feed into increasing volumes,” Patten tells FX Week.
The team at Chatsworth would like to congratulate both Cobalt and Pragma on their well-deserved award wins.