Foreign Exchange Archives - Page 2 of 4

FX Options: Rising Activity Puts Post-Trade in Focus

Volumes in FX options markets are surging and there is no sign of a let-up as interest rates change in major economies when newly elected administrations across a record number of jurisdictions are settling in to govern. The election of Donald Trump as US president may drive increased demand for FX options, as both hedgers and speculators look for ways to navigate expected market shifts and uncertainties.

Given the macroeconomic and geopolitical backdrop of 2024 and looking ahead, the popularity of contracts that grant holders the right but, crucially, not the obligation, to buy or sell assets at a pre-agreed price is understandable, since optionality in times of elevated uncertainty is a highly prized feature.

Overall, traded volumes in FX options have risen 58% year-on-year, according to the US Federal Reserve’s latest FX survey, while the Bank of England recorded a 41% rise in the same period.

As underlying volumes increase, idiosyncratic volatility events, such as the spectacular unwind of the Japanese yen carry trade at the start of August 2024, result in peak volumes that put significant pressure on operations in these traditionally voice-dominated markets, particularly in dealer-to-dealer markets, exposing the inefficiencies and vulnerabilities of manual processes throughout the trade lifecycle. This potential for increased operational risk is driving new interest and adoption of electronic processes in both the front and back office, as we’ll explore below.

In the dealer-to-client space, where electronic processes are more established, multi-dealer venues have seen their FX options volumes nearly triple in the past six years, driven by best execution mandates as well as the quest for efficiencies. The dealer-to-dealer market has been considerably slower to migrate to electronic trading, with interdealer brokers (IDBs) still facilitating most of the trading activity. Interdealer clearing volumes have likewise exploded over the past year, bringing focus on operational risk reduction through the removal of post-trade inefficiencies.

Exploding volumes catalyse market structure change

The surge in FX options trading volumes can be measured across many OSTTRA post-trade services, which are used by the industry to efficiently process trades across multiple steps of the lifecycle.

Interdealer Broker Affirmation

The OSTTRA IDB affirmation service (FXBA), which connects dealers with their brokers to enable affirmation and straight-through processing of executed trades, has seen average monthly volumes increase around 16%, from around 34,500 per month in 2023, to 40,000 per month, on average, in 2024, or 25%, comparing the month of October 2023 with October 2024.

This uptick can be seen as a direct result of more front-office activity, but it also underscores the quest for more efficient and automated processes throughout the trade lifecycle. High-volatility stress events in recent years have seared into institutional memories the importance of risk mitigation through low-latency post-trade processes. When execution moves at millisecond speed, post-trade processing needs to keep pace, without growing volumes causing delays or costly errors.

Centrally cleared FX options

Uptake of interdealer clearing has also seen a marked increase over the past year as firms look to manage counterparty risks more efficiently. Illustrating this trend, OSTTRA has seen ticket volumes more than double on its FX options matching and clearing connectivity platform (OSTTRA TradeServ), which manages the workflows required to prepare and submit executed trades for clearing at global central counterparties, from a monthly average of just above 5,000 in 2023 to almost 11,000 in 2024 (comparing the available data from this year and the same time period last year). And 2023 did not present a particular lull in FX options trading, as previous years tended to be more lacklustre.

While the volume of trades sent to clearing remains much lower than the total IDB-affirmed trades, this is changing as more dealers move towards a cleared model. We can fully expect to see FX options cleared volumes continue to increase.

Tri-party FX options (prime brokerage)

The increase in volumes noted in the interdealer market is being replicated by hedge funds trading with executing banks under tri-party agreements, with our tri-party trade processing service – FX ClientLink and Message Center – also seeing substantial and sustained volume increases. We have seen an average uptick in FX options trades of 20% for the first eight months of this year compared with the same period in 2023, and 36% compared with the same period in 2022.

Risk management under the microscope

The surge in FX options volumes has increased demand for the timely updating of traders’ risk systems, ensuring positions are current as soon as technologically possible. OSTTRA supports post-trade messaging through its post-trade notification services, which provide firms with the ability to publish and receive notices of execution across a large network of trading venues, single-dealer platforms and trading counterparties.

Heightened counterparty credit risk has been a big topic in prime-broker industry working groups in recent years, with a growing demand to tie credit limits defined in designation notices with a real-time view into client utilisation for executing brokers. OSTTRA has provided a post-trade view of prime broker client utilisation to executing brokers for many years as part of its credit management suite, which has now been enhanced to support queries on a pre-trade basis.

“Automating this post-trade workflow is crucial for enhancing operational efficiency and reducing risk”

– Steve French, OSTTRA

Early adopters are integrating the service directly into their internal risk systems using a bidirectional application programming interface to perform real-time pre-trade credit checks for FX options against client limits defined in our designation notice management service. In a further enhancement, the monitoring service is being equipped with vega measurement to provide subscribers with options valuation sensitivity.

Exotics take centre stage

Firms that have historically traded vanilla FX options are now looking to trade more exotic instruments, but this can only be supported across the trade lifecycle on an automated basis if all touch points and processes are uplifted to support these trade types. FX options, by their very nature, are more complex than other FX instruments and rely on post-trade events being triggered to access any underlying asset.

The automation and collaborative management of these events, including the various flavours of exercise and expiry, is attracting renewed attention from market participants. To address the growing demand for broader exotics support, OSTTRA expanded its FX options trade processing services several years ago, and is now collaborating with market participants to increase adoption and leverage the long-standing post-trade event management capabilities of its networks. This collaborative effort aims to reduce manual processes and increase FX options’ straight-through-processing (STP) rates across the industry.

Navigating FX options automation: collaboration matters

Our post-trade services play a critical role in managing rising FX options volumes, but a collaborative industry approach is required to increase STP rates and the use of features associated with lifecycle events, including exercise and expiry.

A great example is the partnership between OSTTRA and SpectrAxe to implement an end-to-end solution aimed at streamlining FX options trading by automating the entire trade lifecycle. SpectrAxe, a US-regulated swaps execution facility, has gone live with the first central limit order book (Clob) to facilitate all-to-all trading for over-the-counter FX options. The venue enables hedge funds to trade anonymously with other hedge funds, proprietary trading firms, regional banks and market-makers via their FX prime broker relationships on a ‘lit’ marketplace. It’s the first electronic Clob trading platform for OTC FX options, an area of the market that remains heavily reliant on voice- and chat-based execution or single-dealer platforms.

Specifically, the offering works from price discovery through to execution, booking and risk management within the FX options market – combining SpectrAxe’s price discovery and execution Clob with the OSTTRA post-trade network, using our affirmation and trade notification services. Automating this post-trade workflow is crucial for enhancing operational efficiency and reducing risk. This combined expertise provides market participants with a streamlined, automated process that not only saves time but also significantly reduces the potential for errors.

This intricate web of technology and connectivity provides the flexibility required for broad market coverage and greater participation. It’s a cost-effective way to optimise workflows and mitigate operational risks in the post-trade lifecycle management of FX options and adoption rates suggest a strong appetite to address these challenges as volumes grow and costs and risks multiply.

With OSTTRA, clients can affirm trades from any bank and submit post-trade allocations to any prime broker, streamlining their entire post-trade management practices for FX options and a broad range of other asset classes. For more information, contact info@osttra.com or visit osttra.com/fx

OSTTRA speaks to e-Forex about FX Settlement Risk: Building industry consensus to address the problem

As FX trading faces the dual pressures of shortening settlement timelines and expanding volumes across a wider array of currency pairs, addressing FX settlement risk (also called Herstatt Risk) is becoming increasingly critical. In this special feature on FX Settlement Risk, OSTTRA provides expert insights to e-Forex on the industry’s challenges, the path towards collaborative solutions and increasing the adoption of Payment versus Payment (PvP) settlement mechanisms.

Featured topics include:

FX Settlement Risk: Determining the scale of the problem and taking steps to address it
Basu Choudhury, head of partnerships and alliances at OSTTRA, shares insights into the growth in FX trading outside of traditional PvP services, and discusses the need for solutions that not only mitigate settlement risk but also provide value.
Service spotlight: OSTTRA solutions at the heart of the global FX post-trade community
We highlight the benefits of OSTTRA PvP Settlement Orchestration for market participants.
What can be done to increase the appeal and adoption of PvP?
This article explains why the industry needs alternative PvP models, supporting bilateral settlement and offering more flexibility in terms of settlement times, regardless of where the market participant is based.
Bright ideas, the promise of new technology and prospects for the future
We discuss why the issue lies not in the technology itself, but in the need for adapted models and shared transparency to manage settlement risk arising from recent non-bank growth, with the future relying on distributed data and collaborative workflows that provide transparency and a shared golden record.

Basu Choudhury, OSTTRA

OSTTRA tackles FX risk with new settlement orchestration and expanded optimisation tools

OSTTRA has added settlement orchestration to its suite of FX services to help clients optimise their derivatives portfolios and tackle critical challenges in the market.

Long known as a leader in post-trade processing and optimising portfolios across multiple asset classes, OSTTRA has partnered with Baton Systems to launch an FX payment-versus-payment (PvP) service that offers settlement risk mitigation for riskier currencies. The partnership, announced in March 2024, aims to address the growing risk of FX transactions traded in the market that are not eligible to settle within established settlement services, with offshore renminbi (CNH) at the forefront.

Under the terms of the partnership, OSTTRA now operates the rule book and technology governing the end-to-end process and orchestration of funds. As such, the rule book defines the ownership of funds at each stage of the PvP workflow as recorded on the distributed ledger, thus ensuring ownership of funds is only transferred when both counterparties have fully funded settlement accounts. Given that OSTTRA has been providing the matching capability for Core-FX since 2018, this effective collaboration between the two firms provided an ideal environment for a smooth operational transition.

With billions of dollars settled daily through Core-FX – and more than $8.1 trillion since its inception – Baton’s distributed-ledger technology (DLT) has already left its mark on the FX settlement landscape. To scale the service, Baton sought a partner with a sizeable network, while OSTTRA – whose links extend to the world’s largest banks and buy-side market participants – was looking to develop its own settlement orchestration offering or collaborate closely with an existing service.

“After an extensive market review and due diligence process, OSTTRA concluded that Baton Systems was a very good fit for what we were looking to do,” says Steve French, Commercial Lead, FX and Securities at OSTTRA. “Baton Systems has a proven DLT PvP solution that we look forward to bringing to the wider market to address FX settlement risk concerns.”

The launch of the PvP service is one step in OSTTRA’s broader strategy to improve the post-trade market structure of over-the-counter markets. It follows on from a strong push by the Bank for International Settlements (BIS) for the FX Best settlement orchestration initiative service for FX settlement risk – commonly known as Herstatt risk – by building a robust PvP framework for FX transactions. BIS’s concerns revolve around the growing potential of settlement failures in the $2.1 trillion of daily deliverable FX turnover that sits outside existing PvP platforms.

Already processing more than 80 million trades a month, OSTTRA is well placed to offer on-demand PvP netting and settlement on a bilateral basis across its sizeable network. However, as part of its mission to optimise and de-risk the portfolios of its clients, particularly market-maker banks, investment managers and large corporates, OSTTRA intends to evolve the service to include settle-to-market (STM) functionality – where the variation margin transferred between counterparties is recorded as a legal settlement of a derivative contract – thereby significantly reducing derivative regulatory capital required under the standardised approach to counterparty credit risk (SA-CCR).

“The initial focus of the new settlement service is on the finality of PvP to reduce settlement risk in certain currencies that stand outside the established settlement networks, with CNH being the most obvious one,” says French. “But our greater mission is to reduce overall risk through compression and optimisation – in addition to improving settlement opportunities – to bring down exposures as much as possible.

“The Holy Grail really is to process STM along with PvP settlement – an approach that is much more efficient because it involves linking variation margin with settlement risk, for which there is a massive appetite in the FX industry.”

Steve French, OSTTRA

Broadening portfolio optimisation

Since its inception, OSTTRA’s focus has been to provide innovative solutions to ensure participants can optimise their portfolios in the prevailing regulatory framework, and interact with any new initiatives in the most efficient way. The introduction of uncleared margin rules in 2016, and SA-CCR most recently, has added a layer of complexity to market participants’ post-trade FX workflows since they are now compelled to closely monitor their exposure to each counterparty to minimise the amount of initial margin they are liable to post and the amount of regulatory capital they have to hold.

OSTTRA offers clients a multitude of options to help reduce the regulatory capital they need to hold and decrease the funding costs of their derivatives portfolios. The choice depends, to a large extent, on whether they want to minimise their cleared and non-cleared initial margin exposures, their leverage ratios, and risk-weighted assets under the internal models method and standardised approach, or gross notionals, among others. However, for most participants, it is highly relevant to consider all of these aspects at the same time to avoid negatively impacting one metric when optimising something else. Therefore, the key objective in OSTTRA’s optimisation solution is to consider all the relevant metrics concurrently, rather than taking a piecemeal approach.

“We recognised early on that focusing on one risk factor in isolation can negatively impact other key issues elsewhere and actually increase the cost of maintaining a portfolio,” says Mattias Palm, head of triReduce FX and commodities at OSTTRA. “Unlike other vendors, we are able to optimise simultaneously across multiple risk factors to ensure maximum efficiency while diminishing potential unwanted side effects.”

With links to clearing houses and efficient optimisation choices, OSTTRA’s clients can now minimise their risk exposures even further and more efficiently. Participants can optimise their bilateral and cleared exposures under SA-CCR, alongside their STM exposures. In a similar vein, OSTTRA collaborated with LCH’s ForexClear to develop a mechanism for clearing FX forwards without negatively impacting cleared initial margin.

Alongside the addition of PvP settlement to its optimisation options, OSTTRA has sought to extend the compression of trades in deliverable currencies not included in existing settlement services. The encouraging results achieved with compression of deliverable Russian rubles mean the same concept is now being applied to other non-Continuous Linked Settlement currencies, with particularly promising results to date with CNH. A key concept is that, during such a compression run, specifically targeted transactions are terminated to reduce settlement risk and gross notional at the same time.

“With all of these different tools at their disposal, it has become easier for our clients to optimise their portfolios because they can do more with less,” concludes Palm. “But the overall idea is that, for optimisation to be truly efficient and competitive, it needs to include all cleared and uncleared margining options, as well as capital and gross notional optimisation, compression, PvP settlement orchestration and STM – all of which should be available at the same time to ensure the most optimal results.”

Since the risk factors that are optimised during a weekly run depend on the needs of clients taking part at that time, OSTTRA is working to increase the scope of every run so that all market participants can optimise their portfolio most efficiently in the shortest timeframe possible.

Mattias Palm, OSTTRA

OSTTRA was named Best settlement orchestration initiative and Best compression/optimisation service for FX at the FX Markets e-FX Awards 2024.

This article was originally published by FX-Markets

Herstatt Risk is No Old Hat, Half a Century on from Herstatt Bank Collapse

The 27th of June 2024 marked 50 years since the collapse of German-based Herstatt Bank showed financial institutions the drastic consequences of unchecked settlement risk in foreign exchange markets. But half a century on, ‘Herstatt risk’ – otherwise known as FX settlement risk – appears to be rising for financial institutions.

Let’s briefly revisit what derailed Herstatt Bank all those years ago to grasp the threat to markets today. Essentially, the firm’s risky bets and mismanagement led to substantial losses forcing authorities to close the bank. The speculative US dollar transactions were taking place across different time zones, meaning that many of Herstatt’s counterparties paid in their side of the trade, but received nothing back from the German bank after the regulators shut the firm. Herstatt Bank’s inability to fulfil its payment obligations wreaked havoc across global financial markets, with counterparties out of pocket for the money they never received – a perfect encapsulation of FX settlement risk which coined the term ‘Herstatt risk’.

The crisis conveyed a clear lesson to markets: the longer one party must wait for the other to meet its obligations, the higher the risk of financial losses or disruptions – possibly with systemic ramifications. Thankfully, Herstatt bank had a small footprint at the time of its collapse. But the issue of FX settlement risk lingered unaddressed for decades until the establishment of widespread payment-versus-payment (PvP) mechanisms for exchanging currencies, a process which sees both sides of a trade simultaneously exchange the currency they owe.

PvP has drastically reduced the risk of settlement failure in global FX markets. These safeguards have largely proven effective in mitigating settlement risk in FX markets over recent years. It’s notable that during major market crises of the last 20 years, in particular the great financial crisis and the Covid-19 market disruption, markets have not witnessed a Herstattesque event.

Unlike with Herstatt bank, the current factors causing an elevated risk of settlement failure in currency markets are not risky bets and bank mismanagement. Instead, it is two powerful changes in market dynamics:

changes in regulations related to settlement timelines, i.e. T+1 settlement; and
an uptick in emerging market currency trading.

Settlement at risk
With US securities now trading on a T+1 settlement regime, asset managers, custodians and banks are grappling with the fallout in currencies. In the run-up to the go-live of T+1, much was made of the potential dangers of compressed settlement timeframes in currency markets. In the initial aftermath, we are yet to see the dangers born out in major incidents of FX settlement failure. However, the shortened cycle adds pressure on a system already at capacity.

T+1 arrived against an already deteriorating backdrop, with growing concern from the likes of the Bank for International Settlements that Herstatt risk is on the rise. It cites the growing share of trades that settle without PvP protection as one of the main factors behind the elevated risk of settlement failure, driven primarily by the increase in emerging market currency trading, typically not eligible for today’s PvP mechanisms.

In fact, at the end of 2022, financial institutions sent $2.2tn worth of currencies to counterparties every day without knowing for certain whether they’d get paid. This is according to BIS data which shows a concerning trend: in 2019, just $1.9tn of transactions settled without PvP protection, an amount that rose 15% in the following three years.

Avoiding another Herstatt
Whether for the inter-bank market, bank to client, or custodians supporting their asset manager clients, the two factors together increase the importance of new alternative PvP systems to add on to the current structures that facilitate safe settlement and netting in foreign exchange markets. This is especially true for the emerging market currency challenge.

Broadening the narrow spectrum of 18 currencies currently eligible for PvP settlement would be a good place to start in tackling rising FX settlement risk, helping to address the growth of emerging markets and the swell of volumes in these non-PvP-protected currencies. In particular for the Chinese Renminbi, which is climbing up the ranks of daily FX trading volumes.

Rapid advances in technology are also opening new ways for risk management across all stages of the trade lifecycle, and FX settlement should be no different. Peer-to-peer networks, distributed data applications and shared workflows make FX exposures fully traceable across entire networks, with atomic settlement providing the speed to conduct trades efficiently in times of market stress. Meanwhile, in normal market conditions, network services enable users to optimise liquidity management through the use of netting and payment orchestration, which in turn minimises funding requirements and costs, in addition to reducing settlement risk.

But as always, an industry-wide paradigm shift requires extensive collaboration among peers and competitors. This may seem a dubious prospect, but the alternative is to wait for an FX settlement failure to hit the headlines, hopefully in a less spectacular fashion than the Herstatt collapse of half a century ago. The latter must not be considered an option. After all, while history seldom repeats itself, it often rhymes.

To find out how OSTTRA can help mitigate bilateral FX settlement risk between participants, watch this brief explainer video or contact us using the form below.

Post-Trade Dictionary: Decode Industry Terms from A to Z with this Post-Trade Glossary

If Amazon did T+1 Settlement: How Post-Trade Operations Are Moving Towards Real-Time Control

From monitoring bank balances to tracking package deliveries, we’ve grown accustomed to having information at our fingertips. But what about the state of post-trade operations in the capital markets? As regulations tighten and demands for efficiency are increased by the transition to one-day settlement cycles in US securities, the need for real-time visibility and control in post-trade operations is becoming paramount.

The act of onboarding clients and the processes around trade allocation, confirmation and affirmation are unlikely candidates for headlines about transformative technology innovation when pitched against the thrill of front office trading and the excitement that AI and blockchain technologies still generate. And usually they can’t compete – even if all institutional trading relies on the efficient and robust running of post-trade systems behind the scenes.

But this year is post-trade’s time to shine. The SEC’s decision to shorten settlement times to T+1 has sparked a rush of interest in the sector: once the bonnet was opened, market participants started wondering if it was time for a full vehicle inspection. Even though the focus of the regulation for T+1 settlement is securities, there is an indirect effect on FX and fixed income too, and many firms are now taking an holistic view on operations processes across all asset classes. Shorter FX trading-settlement timeframes reduce the window for resolving issues, necessitating efficient and timely technical account onboarding, data completion, and issue escalation, especially given the complex, multi-regional nature of cross-asset processes.

Our Onboarding, Connectivity and Operations service enhances post-trade operations and connectivity, enabling clients to efficiently monitor and manage their networks. Just as your smartphone app keeps you informed about your financial health and the whereabouts of your Uber ride, post-trade operations now require a similar level of real-time transparency and accessibility at a time when supervisors’ stance towards operational challenges is becoming increasingly unforgiving. The pressure is on for banks and investment managers to demonstrate full control over their post-trade processes. Like tracking your Uber’s journey, operational teams need to know where trades stand, identify bottlenecks and errors, and take proactive measures to ensure timely settlement.

Regulation and oversight as key drivers

A single change in the overall financial market ecosystem often has ripple effects across the whole network, with some consequences more noticeable than others.

In the case of moving to a 50% shorter settlement time for US securities, market participants in FX will have 83% less time to perform post-trade processes than in the current regime, according to calculations from industry association AFME.(Source)

Another key consideration is whether the shorter timeframe will affect performance, or in other words whether the risks of failed trades and operational errors would increase. The short answer, according to both AFME and buy-side industry participants, is an overwhelming yes.

Post-trade efficiency is firmly in the sights of regulators and industry oversight bodies. In currency markets, the FX Global Code of Conduct is calling for better operational processes, including more timely confirmations as well as a general technology upgrade to increase efficiency and accuracy. The standard-setting body for OTC derivatives, ISDA, continues to focus on give-ups and the timings associated with communications around them.

In European securities markets, the settlement discipline regime of the Central Securities Depositories Regulation (CSDR) has introduced several measures to reduce the number of settlement fails, to prevent such failures and to cajole market participants into settling accurately on the intended dates.

In the futures markets, FIA and DMIST, the Derivatives Market Institute for Standards, jointly announced the publication of the Final Standard for Improving Timeliness of Trade Give-Ups and Allocations, designed to improve the delivery and processing of allocation instructions by establishing 30-minute timeframes for completing steps in the allocation process .

In summary, regulators and oversight bodies are quite clear in their messaging to market participants: operational failures such as trade breaks, and system outages will be met with a zero-tolerance policy from rule makers, and full historical post-trade transparency and visibility is a must.
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Change for the better: real-time service monitoring and more

To comply with these rules, market participants need to have more granular visibility into what happens to trades after execution, which in turn requires infrastructure and service providers to step up their game in areas such as flexibility of access, onboarding and integration, among others. That means it’s all eyes on onboarding, connectivity and operations.

Achieving this operational upgrade is more complicated than it sounds, due to the complexity of the post-trade ecosystem and the varying levels of technology requirements participants have. Legacy and fragmented post-trade infrastructures across multiple systems and vendors have to be consigned to the past in favour of a single, more closely-coupled system.

It’s in everyone’s interest to have better visibility into the health of the systems, services and counterparties involved in the affirmation, matching, confirmation and clearing of trades. Consider your Fitbit alerting you when your heart rate spikes unexpectedly. Similarly, in post-trade operations, timely alerts and diagnostics are crucial for identifying and resolving issues before they escalate. Whether it’s pinpointing delays in trade processing or diagnosing connectivity issues with counterparties, the ability to swiftly address problems is vital. With T+1 settlement approaching, the stakes are higher than ever, akin to keeping a close eye on your health indicators to prevent potential complications and unpleasant surprises.

Just like we have become accustomed to skipping queues through self-service, banks and investment management firms are requesting greater autonomy with respect to the initial integration and technical onboarding of their systems and underlying clients through self-service tools. The expectation is that this should be combined with greater visibility into the health of their post-trade networks and services including the physical and logical connections used to carry messages between market participants, all supported by a comprehensive customisable reporting suite. This includes greater flexibility with respect to accessing services, which is fueling demand for Single-Sign-On (SSO) and operational dashboards driven by real-time data accessed via API.

In response, OSTTRA has developed a new service for its clients – OSTTRA’s Onboarding, Connectivity and Operations (OCO) Suite – enabling network participants to track the health of their post-trade operations across asset classes and counterparties. The initial release provides enhanced system monitoring:

OSTTRA for Onboarding, Connectivity and Operations provides granular visibility into what happens to trades after execution.

Get granular visibility into what happens to trades after execution with OSTTRA OCO.

While the cost of operational failures has never been higher, regulatory and supervisory forces are combining with business needs to create an unusually difficult landscape to navigate. This is why market participants need to move towards a single screen to view operational processes and away from the current, fragmented approach.

This desire is reflected in the exchange traded derivatives (ETD) market, according to the findings of a March 2024 listed derivatives study, produced by Acuiti in association with OSTTRA: Almost 90% of ETD market participants surveyed said that it would be either crucially or very important to have a consolidated view of T+0 and T+1 processes, a desire particularly evident among the sell-side. The biggest benefits of such a view would be in risk reduction according to survey respondents, but there are also perceived upsides in operational efficiency and costs.

Clearly, as the industry prepares for an unyielding approach from regulators around trade breaks and systems down time, market participants need better visibility into the health of their systems, networks and trade status as well as an easier ride in terms of interacting with and managing processes.

When a Prime Experience Comes to Post-Trade Operations

Against an accelerated market dynamic, market participants want greater autonomy to go at the pace needed to bring solutions to market quickly. They are asking for the ability to use self-service tools during the initial integration and technical onboarding of their systems and underlying clients and they want to combine these with a greater level of visibility into post-trade networks and services, in a way that’s personalised and intuitive, just like the everyday instances of self-service we’ve all become used to.

After all, this already happens in other areas of life: the ability to track packages, taxis and food orders after the purchase is taken for granted in most customer-facing areas. Amazon customers rarely need to call the Amazon helpdesk because the service interface gives you all the info you need about your past and pending orders, orders currently out for delivery, mechanisms for raising queries and product how-to features, among other things.

For post-trade, this means an increased granularity and visibility into connections that handle messages between participants, both physical and logical, and a comprehensive and customisable monitoring suite. There is also growing demand for creating a Single Sign-On entry point for services in the same bucket to streamline workflows and step-up efficiencies.

Abundant data and the ability to easily channel information through automatic API connections has given rise to expectations that processes and exceptions should be viewed in real-time in a convenient format such as a dashboard.

But it’s not just ease of access and user experience that’s driving the quest for efficiency in post-trade, and it’s not just regulatory change either. As large financial market players continue to face headwinds, even marginal improvements along the post-trade lifecycle can make a meaningful difference to balance sheets.

In the year ahead, these headwinds will persist, according to consulting firm Deloitte, which predicted in its 2024 outlook for financial services that “banks’ ability to generate income and manage costs will be tested in new ways” while noting that “multiple disruptive forces” are conspiring to reshape the foundations and the architecture of banking and the capital markets industry.

These factors are making it imperative for market participants to see and manage the whole picture, not just parts of the post-trade jigsaw puzzle. It’s a small surprise, then, that Acuiti’s study predicts a push towards consolidation of vendors and processes, as market participants strive to reduce complexity. The survey found that the overwhelming majority of companies are now looking to consolidate their relationships with vendors to those that can offer comprehensive post-trade services covering the full lifecycle of trades.

What It Takes To Turn Post-Trade Into A Five-Star Rated Experience

Just like when you decide to cancel your booked Uber ride when your driver is stuck in unexpected traffic, market participants should be notified about any and all events that impact trade matching. Factors to monitor should include physical and logical connectivity, system outages, platform performance as well as failed and pending messages, which impact match statuses, trades processed and associated market participants.

Trades could fail for a variety of reasons but market participants get little actionable information about such events at the moment. Better visibility into what happens to trades before they arrive at the back office is one of the key areas where there is demand for improvements, especially if there are operational reasons involved in a failure.

Rather than just identifying that there is a discrepancy, market participants should be able to tell which trades are having issues due to operational reasons and where those problems are before failures happen. The ability to see in real-time the status and health of trades as they traverse trade lifecycles and ecosystems would reduce the chances of errors creeping in unnoticed and resulting in failures or broken trades.

Similarly, dealing with exceptions should be easier and solved in a way that allows firms to track, manage and resolve these issues as soon as possible and in a structured manner. Automating incident management and allowing both parties to track them, enhancing both inter- and intra-company collaboration and enabling remediation are actionable steps for the industry.

Reporting is also ripe for upgrades and it’s an area where market participants would benefit from better visibility into operational and trade level metrics as well as the ability to compare and benchmark firm-level performance against peers. Having more control and autonomy over the format and frequency of these summaries and insights would allow institutions more flexibility to prove good performance and regulatory compliance.

Standardising how post-trade information is accessed and distributed is also something where efficiency gains need to be made. Adopting API connectivity for post-trade workflows and operational data access would significantly upgrade the quality of the user experience and increase the utility of the data and information.

These are just some of the examples that could benefit the overall ecosystem and promote the health of both the post-trade networks and its participants. The Onboarding, Connectivity and Operations service for OSTTRA clients aims to address this challenge by offering a seamless way of increasing transparency and control of post-trade operations:

OSTTRA for Onboarding, Connectivity and Operations

What three words for the post-trade path ahead: volatility, risk and control

Equity markets are surging to new highs and risky assets continue to remain buoyant despite interest rates in major economies staying at multi-decade highs. The approval of Bitcoin ETFs has launched crypto on Wall Street for real, in a year when the world’s population is heading into a record number of elections. Rate cuts, new dynamics in some markets and quite a lot of event risk are conspiring to lay the groundwork for elevated volatility.

For traders, this is great news because high volumes and volatility promise the possibility of rich pickings. From an operational point of view, it’s a more mixed outlook that will be about balancing the need to manage operational risk with the need to heed the shareholder call to achieve operational efficiencies that shore up margins.

As this financial landscape evolves rapidly over the next year, the accelerated evolution of post-trade towards on-demand operational insight and real-time monitoring is not merely a regulatory necessity but a strategic business imperative. Just as we rely on seamless digital experiences in our daily lives, financial institutions must adapt to this new paradigm: Instantaneous visibility and control aren’t just conveniences; they’re essential tools for mitigating risk, ensuring compliance, and optimising performance. With T+1 settlement leading the charge, the push for transparency and efficiency will extend beyond equities to encompass other asset classes like FX and fixed income, and far beyond the borders of the United States of America, with post-trade pundits expecting a move to T+1 in the UK and the EU in 2025.

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Our OCO suite helps OSTTRA clients improve operational control and reduce operational risk through the delivery of automated service connectivity, self-service onboarding, real-time service monitoring and exception management, and customisable reporting. To find out more, please visit OSTTRA for Onboarding, Connectivity & Operations.

Firms Seek Optimisation Gains as UMR and SA-CCR Bite

A wider range of market participants is taking advantage of service providers such as OSTTRA’s optimisation cycles to drive margin and counterparty credit risk efficiencies across asset classes including FX, rates, equities, commodities and credit.

With the transition to a new capital regime on counterparty risk and uncleared financial instruments largely complete, in the past year, market participants have increasingly turned to service providers such as OSTTRA to reduce gross notional and counterparty exposure in the most efficient manner.

Since the last phase of the uncleared margin rules (UMR) was rolled out in September 2022, coupled with the shift from the current exposure model to the standardised approach to counterparty credit risk (SA-CCR), market participants across most jurisdictions have been compelled to closely monitor their exposure to each counterparty to minimise the amount of initial margin they would potentially need to post.

“Through our services, clients can significantly optimise counterparty credit risk across multiple bilateral relations without impacting their market risk profiles,” says Christina Högegård, Business Manager, triBalance and triReduce at OSTTRA. “In doing so they reduce their initial margin under UMR, their cleared initial margin and their capital requirements under SA-CCR and the internal models method (IMM).

“By regularly using a service like OSTTRA triBalance, our clients can continuously lower the amount of margin they need to post. Optimising their exposures across multiple counterparties means they can reduce the amount of regulatory capital held for that purpose, freeing it up for use elsewhere,” she explains.

Until recently, optimising counterparty risk was largely the concern of global systemically important banks (G-SIBs). As more firms are captured by UMR and with the new capital regime in place, that concern has filtered down to smaller sell side players that have joined OSTTRA’s network in growing numbers over the past year. The buy side is also showing increased interest in optimisation.

By connecting G-SIBs with wider banking, buy-side and central counterparties across its global network, OSTTRA helps market participants optimise capital allocation and counterparty credit risk across a range of asset classes including FX, rates, equities, commodities and credit. Interest has grown – particularly among market participants with significant exposure to the rates and FX markets, as record breaking optimisation cycles in these asset classes are regular occurrences.

Optimisation runs

To generate the best results, market participants take part in regular optimisation runs, the frequency of which depends on the asset class they wish to optimise. The most frequent runs are conducted for FX, and participants can optimise initial margin, leverage ratios or risk-weighted assets – or all three at the same time.

Frequency is driven by demand and is based on what market participants feel works best for the exposures they have in a particular asset class. So, currently, rates run bimonthly, equities monthly and credit runs on an ad hoc basis.

“With weekly FX optimisation runs, we give participants the opportunity to optimise initial margin frequently and see that the benefits last for some time. Some choose to optimise weekly and some less frequently. In addition to initial margin, they can also optimise SA-CCR and IMM [exposures] in the same runs, as often as they wish,” says Högegård.

“The incremental benefit of optimising more frequently needs to be weighed against the resources used and additional notional put on. However, the benefit is greatest the day after the optimisation run and, with a fully automated process, participants could optimise every day.”

At the start of a run, market participants upload the exposures they wish to optimise to the OSTTRA triBalance portal along with any conditions they would like to apply. An optimisation algorithm analyses clients’ chosen exposures and provides them with a detailed proposal outlining how their portfolio can best be optimised according to their requirements. Each optimisation run will typically start and be finalised within half a day.

The potential for optimisation of any given portfolio is contingent on its inherent composition, the asset classes involved and on the directionality of the trades. On the back of increased volatility and high interest rates, the optimisation potential of each run increases accordingly.

“Regardless of their motivation for using our services, the ability to face as many counterparties as possible is important in terms of getting the most out of the service,” concludes Högegård.

OSTTRA was named Best compression/optimisation service for FX at the FX Markets e-FX Awards 2023.

To find out more, contact info@osttra.com.

Compression & Optimisation Update – October 2024