FX trading: How to optimize currency exchange settlements

The growing global regulatory landscape, continuing fluctuation of global currency values and external market forces are all creating a challenging environment for foreign exchange (FX) operators in corporate treasuries. According to a 2016 report by the Bank for International Settlements (BIS), more than $5 trillion in FX are traded every day, illustrating the size and magnitude of the foreign exchange market.

A daily task in a treasurer’s workflow, FX trading involves some challenges related to the processes often used to operate in that market. Many treasuries still operate FX over the telephone. To negotiate with more than one counterpart, it is common practice to make several phone calls simultaneously to obtain quotes from different banks. Without simultaneity and monitoring resources, the treasury lacks a complete picture of the market and is thus unable to know if a given settlement will be the most advantageous from a cost standpoint.

This process, both imprecise and potentially costly for the treasury, does not guarantee that the price negotiated over the phone is compatible with the market average — nor that the trade was closed at the best price. It also does not guarantee that trading data has been entered correctly into the company’s ERP or allow for rapid analysis of the history of all such transactions.

The impact of this on the treasury is immense — in addition to making the company vulnerable to errors and inconsistencies, it can significantly increase expenses on currency transactions by way of trades with a limited number of banks and high spreads.

More information: More control and less risk

The ability to search for results and create historical reports provides an excellent competitive advantage. Using a system and having access to the same information as the banks guarantee transparency and elevate the company’s structure to the same level as that of the banks, providing the market context required to conduct any trade, for example, obtaining competitive exchange rates in the market.

By using an electronic trading platform, a small team of financial analysts can become more robust and strategic without needing to add members. In the traditional, manual format, the treasurer must search for quotes on numerous websites and through telephone sources, and then gather them together in order to make a decision. Accordingly, there is no guarantee that the exchange rates obtained are the best in the market.

Accessing FX quotes in real time ensures greater agility and accuracy. By adopting automated electronic tools for foreign exchange trading, the treasury can create good practices and ensure transparency and security for the department and the company as a whole — resulting in efficiency and cost savings.

Increasing workflow efficiency

Managing risk and establishing assertiveness in trade execution are essential assets for large companies. On smaller teams, a treasury analyst will often seek the help of colleagues (even from different departments) to get quotes over the phone and produce execution reports; such help impacts the company’s workflows and processes.

Electronic trading optimizes time, talent and money resources, making it easier to create an automated routine that allows post-trade steps, such as reporting and auditing, to be more agile and error-proof.

Minimizing operational risks

There are also operational risks. The treasurer who seeks quotes from different banks and institutions in a less-automated way not only wastes time, but this tactic is also subject to human error. In a standard trading workflow, most closed deals are entered manually one by one into an Excel spreadsheet, resulting in possible typos. Additionally, setting up transaction histories with all available quotes and proving that the best choice has been made become more complex and risky when you do not have the right tools to hand.

Essentially, the time devoted to these operations does make a difference. Obtaining quotes by phone from several counterparties in order to analyze and choose the best offer leads to a framework in which the analysis of the trade may not correspond to the final execution due to exchange and spread variations.

Clear assessments and profitable strategies

Automation also implies a clear assessment of transaction costs, reducing spreads by generating more competitive price dynamics among consulted banks. Trading tools can also show clearly and in real time which counterparty is offering the best price. The settings on an electronic tool are able to, for example, lock the best price so that trading can only be performed if that option is selected. This is a valuable resource for auditing and supports corporate compliance policies.

Execution confirmations and trade management also help assign responsibilities, while daily and monthly execution histories enable you to quickly and efficiently evaluate and analyze problems and devise more effective trading strategies.

How the Bloomberg Terminal can help you:

• Get access to the world’s largest FX trading community.
• Reduce spread and transaction costs and eliminate commissions for the execution of spot, swaps, NDFs, deposits and options deals.
• Ensure trade settlement only at the best available price.
• Set the best timing in FX execution through analytical tools.
• Request prices from preferred banks in just a few seconds.
• Implement direct integration with all company systems — from front office to back office.