A Look At FX Post-Trade Processing Amidst Mounting Regulation

With global markets reeling from regulation, the need for post-trade processing for equities, fx transactions, and SEFs have been put

With global markets reeling from a cascade of regulatory edicts and volatility, the need for post-trade processing for equities, foreign exchange transactions, and swap execution facilities (SEFs) have been put under the microscope, culminating in the questioning of presently used back-office operations and settlement options.

Regulatory Attention Turns to Varying Aspects of Financial Operations

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Indeed, the front-office habits of several foreign exchange operations and leading banks have collectively absorbed the negative press of the financial industry as a whole recently, however the onus also lies with the behind the scenes back-office atmosphere. As such, in a move that promises to foster greater transparency, regulators are adjusting their gaze towards the latter, exclusively giving attention to post-trade processes for an assortment of asset classes ranging from foreign exchange to over-the-counter (OTC) trades.

lauraAccording to Laura Craft, Director of Product Strategy at Traiana and Co-Chair of the FIX Global Trading Community, “Increased electronic activity allows regulators to store trade-related information easily, irrespective of volumes, even as they are sent to central counterparty (CCP) clearing houses for examination and reconciliation. The move towards CCP clearing for OTC trades is one of the key regulatory shifts underway for swaps and so forth.”

Ultimately, this move comes as little surprise given the recently publicized forex probes and scandals sending shockwaves through the industry. Post-trade processes lie at a very critical juncture between financial integrity and regulatory awareness – by encouraging trading institutions on both the buy and sell-sides of market operations to promote greater awareness, oversight, and the utilization of electronic trading initiatives, a better glimpse can be provided into the trading activities of constituent firms.

Market Participants and Firms Turn Increasingly to FIX Protocols

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fixprotoGiven these stimuli and the need for greater transparency across asset transactions, many market participants and adjoining firms have opted to utilize such measures as the Financial Information Exchange (FIX) protocol. This system relies on the instantaneous transfer and exchange of information and direct market access to caches of financial information. While these initiatives are typically reserved for the front-nd of executions, FIX messaging is taking hold as a tangible option for post-trade allocations. Apart from the obvious benefit of greater visibility into trading activity, the adoption of FIX yields a lower cost option of confirming trade specifics in a more efficient manner. In light of recent events, this protocol has gained traction within the foreign exchange industry as well as derivatives and fixed income markets.

Unknown“Traiana has been integral in working with the industry via the FIX Trading Community Global Post-trade Working Group to ensure that standard post-trade guidelines and workflows are available to market participants – elements of complacency have crept in to the collective wisdom concerning the middle and back-offices; this is what needs to change. Up until recently, it had become an accepted truism that post-trade processing would always lag behind executions on T+1, T+2 and T+3. With trade confirmations coming on T+1 or T+3 the possibility arose for complications and confusion in the reconciliation process,” noted Craft in a recent panel discussion on post-trade transactions.

Trade Reconciliation Unlikely to Reach TO Anytime Soon Given FX

As such, the advent of more effective and automated post-trade processes and widely accepted processes have afforded many firms and market participants the confirmation of trades in T0, or the instantaneous settlement. This comes on the heels of a spirited attempt in the last calendar year to close the gaps between execution and trade reconciliation, the impetus for mounting technological innovation and new practices.

Unfortunately, “Full reconciliation of trades is unlikely to reach T0 at the moment due to the global footprint of markets and foreign exchange markets still adhere to T+2 settlement. Regardless of the sophistication of the post-trade technology, there is no work-around to speed up settlement on trades happening between distant geographies, time zones and across currencies. For this reason, there will always be a delay between the trade execution and the reconciliation,” Craft portends.

Despite this prediction, it does remain possible to alter this practice possibly over a longer timetable via the automating confirmations of trades from brokers. Ultimately, the goal is T0 clearance and should the process approach this realm, the reconciliation will likely proceed to a T+1 basis, which obviously is heralded as progress.

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