FX – Next Level
By Christian Schoeppe, Managing Director & Founder, SchoeppeFX
When it comes to Foreign Exchange (FX) trading the Covid19 pandemic uncovered that many institutional investors are not positioned at the level they could potentially operate at. At SchoeppeFX International Consulting we have seen an increased demand of asset & wealth management clients to identify and leverage new potential for value creation and cost reduction through innovation and automation in a new work 2.0 environment.
This new remote-working and travel-ban environment has forced institutional investment managers even more to rethink the way they assess internal & external clients, platforms and service providers. Although most FX trading operations have been functioning well since March, amongst buyside end-clients it is still frequently observed that a lot of digitization projects e.g. are carried out ineffectually without exploiting its full potential. Additionally, unlike many other industries financial services have been a latecomer to the paradigm shift towards flexible working structures and working from home.
Areas of Focus
Therefore, the need for dedicated next level currency consulting has taken center stage. As a result of the pandemic situation clients across the globe are increasingly looking for updated means to ensure excellencein FX trade management across four key service areas: strategic consulting, operational excellence, collaboration, and risk control.
Analyzing the individual FX setup of our clients from scratch is the key primary element in order to subsequently establish technology and processes at a cutting-edge level across the FX value chain, covering all areas of interaction with clients, liquidity providers, portfolio management, operations, and compliance.
Buyside clients want to be able to select an order management system, or a foreign exchange provider, or a trading solution that really fits and improves the way they work, focused on increasing interoperability and performance whilst reducing manual interaction and execution slippage. A detailed holistic look at the FX value chain helps such clients in answering strategic questions right from the beginning.
During and after the Lockdown strategic business reviews across our target client base indicated clearly what has worked and what has not across front, middle and back office functions – e.g. in the areas of: asset & wealth client services, active and passive overlay, treasury & portfolio trading or embedded FX execution. In general, buyside clients tend to benefit from greater flexibility of their underlying FX trading business model if they treat FX as a dedicated asset class instead of a side-product of traditional asset classes like equities, fixed income or real estate.
The decisive question for corporates and investment managers in these times is: do they just want to return to the status quo before the pandemic or are they able to significantly improve their trading set-up and bestexecution framework for FX? Future winners will continuously strive to optimize business results and systematically increase the trading performance of their investment concepts. This includes re-evaluating platform processes and in- & outsourcing decisions for asset & wealth managers as a must.
Mostly affected by this new paradigm shift is the operational set-up of clients. Investment managers are mostly concerned about controlling costs in volatile markets, followed closely by a focus on risk and compliance issues, and support for expansion into new markets.
Various analyses of structures and processes in buyside FX trading have shown ongoing deficiencies in terms of system integration, automation and cloud-based solutions. During the pandemic a lot of corporate and investment clients across the industry were able to observe digitization gaps and areas of improvement in technology set-ups, cross- functional workflows and controls.
This necessitates conducting a bottom-up health check of transaction management and cost analyses (TCA) to uncover hidden potential for efficiency gains and cost savings.
Subsequently simplifying and automating FX trade flow allows for reducing execution costs by investing in scalable technology to eliminate inefficient operational processes.
This also includes enhanced remote and mobile access to production and UAT trading, execution and settlement platforms. The pandemic uncovered the systems access gap on the buyside not for the first time: more service, tools and functionality provided only to external clients but not to any similar extend to the internal workforce doesn’t help with achieving better overall results in a next level work 2.0 environment.
Taking the FX trading business to the next level requires new forms of cooperation with innovation leaders. Corporates and investment managers now have to keep up even more with any changes within traditional relationships, and in some cases familiarize themselves with new internal and external developments in a different virtual manner. Proactively identifying this challenge will remain essential in the coming months and even years.
Asset and wealth managers today want true flexibility in choosing the best partners for their investment processes, which contributes significantly to ensuring sustainable cooperation and long-term competitiveness as well. Many clients have realized that now is the time to enrich client experience and performance with the help of innovation leaders in the FX industry in order to expand perception and awareness for their products and services in this dynamic environment.
Increasing recognition and reputation through customized marketing, at industry events and trade conferences requires a different approach across regions, locations and applications in a work 2.0 remote & webcast environment than before. Under these conditions, participation in a large, diverse FX community of dedicated experts enables firms achieving real differentiation from competitors.
Conduct & Controls
Last but not least, reputation is naturally created through compliance. The most prominent treasury conduct & control malfunction just happened after the lockdown in Germany and has shown again: too many customers underestimate the risk potential of non-compliant processes in terms of regulation and financial transparency. While more complex data sets are becoming available, new technological tools are increasingly supporting all three control areas of audit, compliance and business.
Outdated or ineffective foreign exchange transaction and risk controls can have fatal consequences for buy- and sell-side trading organizations. All cases of abuse in the past and present have indicated the importance of ensuring that no matter if retail or institutional business all FX trading policies and procedures must meet national and international requirements covering benchmarking, monitoring and reporting.
Conduct is mission critical – we support clients in continuously improving their FX standards from regulation to practice, and in building and developing organizational proof of compliance in order to avoid costly cases, which could be frequently observed over the past years. For example: more and more corporate clients are looking at embracing the Global Code of Conduct for FX now, which had been watched from the distance in this sector for a long time until recent developments.
FX next Level
In summary, any business planning to shift back to their pre-COVID-19 way of operating foreign exchange trading business once lockdown ends will find it challenging to remain successful for corporates and investment managers. Identifying and exploiting new potential for FX value creation and cost reduction has become crucial in a cloud-based industry environment 2.0 to avoid disruption and secure long-term competitiveness.
Our clients are proactively thinking of how to modernize their operations and are turning to innovative providers who are able to give them access to digital tools that automate workflows and support self-service whilst providing the intra-day data and analytics they need for informed decision making. Process and transaction cost analyses facilitate cross-silo performance management and controlling, and show the extent to which trading and treasury setups and results can be optimized to reach the next level.
The ultimate target in next level currency consulting is a tangible increase in future FX trading & investment performance for clients. We expect that many firms will reprioritize their IT budgets, having seen the extreme conditions that are possible, as they will need to brace themselves for any eventuality. The future winners will be those corporates and investment managers rethinking their operating models from a holistic perspective, seeking sustainable changes that can help them drive profitable growth beyond 2020.
The Time is Now.
Christian Schoeppe founded SchoeppeFX in January 2020 following eight years as head of FX Trading (EMEA) at Deutsche Asset Management.