eFX trading: Why corporate treasurers should hang up the phone
Around 80% of global foreign exchange trading now takes place electronically, according to the TIBCO StreamBase FX Trading and Technology Trends report. Yet corporate treasury is one area where voice trading remains common—particularly in Asia where many restricted currencies require on-shore settlement.
That picture is changing. Greater access to technology, evolving regulation, and a more domestic focus at international majors has led to wide adoption of electronic FX trading at regional and large local banks. With almost all Asian currencies now available to trade on electronic platforms, internal pressure on treasury to adopt eFX trading is mounting.
Moving from manual to automated execution was the topic of discussion in the FX Treasury Dealing Best Practice in Asia webinar, held jointly by Bloomberg and the Corporate Treasurer. Here are the five key benefits of eFX trading identified by the speakers.
Get better pricing & liquidity
When a local controller picks up the phone to request an FX quote from a single bank, the bank often gets the better half of the deal. As the sole price maker of the transaction, the bank can skew the prices to their favor as they also usually know the side the client will trade on. To request multiple quotes, the corporate treasurer must make multiple calls to multiple banks. The adage that a treasurer only has two ears—and the fact that they have many other responsibilities beyond pricing FX trades—significantly limits their ability to create price tension.
Electronic trading enables corporations to request and compare quotes from several banks in real time, increasing liquidity (particularly when trading restricted currencies) and generating competition that can lead to savings. Moving to a multibank eFX platform enabled AkzoNobel Paints (Asia Pacific) to decrease its spread costs by between 50% and 70% over a period of around six to nine months, according to Jarno Timmerman, the company’s Head of Treasury (SEAP). Cumulative savings can often be tracked within the eFX platform itself, enabling treasurers to demonstrate an ongoing return on the initial investment.
Streamline & standardize processesÂ
Electronic trading gives corporate treasury far greater visibility into their FX exposure in the various markets in which they operate, enabling the standardization and simplification of processes, as well as the potential netting or consolidating of group positions. As all trades can be passed through the centralized treasury management system, FX volatility—a particular issue in emerging markets—can be captured at group level and fed into strategic planning. Straight through processing, automated reporting and seamless post-trade integration can also reduce risk and streamline compliance processes.
Improve communication & control
Fear of input errors, or fat finger trades, deters some corporations from adopting eFX trading. Yet phone trading can have a greater margin for misunderstanding, given that many numbers sound similar (e.g. 15 and 50) and that language barriers may exist in some markets. Many corporations also commit to large FX transactions over the phone with no record of the conversation. Electronic trading can help eliminate verbal misunderstandings and deliver other internal and FX control benefits.
A clear, second-by-second audit trail is automatically generated, while built-in confirmation reduces the lag time when tracking down any problems. While one errant phone trader could ruin a company in a day, eFX platforms enable limits and controls to be imposed on an employee-by-employee basis. Automated checks at each stage of the trade and the segregation of control between treasury and front, middle and back office can also be established.
Strengthen bank relationships
E-trading skeptics worry that cutting off regular phone contact will damage their relationship with their banks. Yet those calls are largely transactional. Moving to eFX can free up that time for more strategic and insightful conversations, potentially improving the relationship with the bank. Moving to an electronic platform also has operational benefits for the bank, and treasurers may also encounter less resistance than expected should they introduce a multi-bank model. “You can show more of your business to more of your banks. That gets you better prices but is also fairer to the banks,” said David Blair, Managing Director, Acarate Consulting. “It gives them more opportunities to win your business.”
Limiting the number of banks on your requests for quotes—between three and six is considered optimal—is key to maintaining a healthy balance between price tension and rewarding banks with orders. The transparency inherent in eFX systems also helps improve relationship reviews, enabling the treasurer to empirically show why a bank has failed to win the corporation’s business and in what areas it needs to be more competitive.
Increase staff efficiencyÂ
Electronic trading can cut transaction costs, but can also make better use of valuable employee time. Straight-through processing can reduce the workload on back office, and with electronic platforms taking care of the transactional grunt work, treasury can spend more time on understanding what’s happening in the FX market, calculating out the corporation’s underlying exposures and developing better hedging strategies.
“If you’re paying your staff well, you don’t want them spending half an hour on the phone to book a trade,” said George Holdefehr, APAC FX and Commodity e-Trading Business Manager, Bloomberg. “You want them to be getting good insight from the bank, working on other processes that can be more beneficial to your organization.”