Industry Aims To Overcome FX Post-Trade Fragmentation

Shanny Basar

IHS Markit expects to gain substantial traction over the next year in the use of a distributed ledger to improve efficiency in post-trade for foreign exchange as a result of its partnership with Cobalt, the fintech post-trade processing network.

IHS Markit, which provides critical information, analytics and solutions announced that MarkitSERV and Cobalt are collaborating and that the firm will make a strategic investment in the fintech firm. MarkitSERV is a multi-asset class service for managing trade confirmation, clearing, allocation of block trades and regulatory reporting.

Chris Leaver, managing director and head of FX at MarkitSERV, told Markets Media that the firm has been involved in foreign exchange for five to six years with a view to standardizing and centralizing post-trade in FX, as the firm has done in interest rate swaps and credit default swaps.

In order to grow in FX, IHS Markit acquired Logicscope in 2011 and DealHub in 2015.  Logicscope provides post-trade workflow solutions and straight-through-processing for foreign exchange transactions while DealHub provides FX trade processing and trading services.

Leaver said: “We met Cobalt 18 months ago and they bring a huge level of efficiency to the fragmentation in FX post-trade while believing in providing a shared infrastructure.”

He continued that MarkitSERV has a global network of more than 800 FX counterparties and a migration team of specialists to cut the time it takes to bring Cobalt to market.

“FX has no shared infrastructure despite being one of the largest and most liquid markets,” he added. “We have solved these issues in the over-the-counter derivatives market.”

In high-velocity, high-volume FX markets MarkitSERV provides straight-through processing services and an electronic platform to help banks manage pricing, execution and hedging workflows. In FX  derivatives, such as non-deliverable forwards and options, MarkitSERV provides post-trade confirmation and connectivity and workflow for clearing and trade lifecycle management.

At launch, the partnership with Cobalt will focus FX spot and spot forwards.

Adrian Patten, co-founder of Cobalt

Adrian Patten, co-founder and chairman at Cobalt, told Markets Media: “Any fintech working with banks has to go through a lengthy process. Connectivity will be much simpler with IHS Markit clients.”

The majority of settlement in the foreign exchange market takes place through the CLS, the bank-owned infrastructure. Cobalt was set up to cut 80% of costs through allowing more efficient management of trades though their life cycle before settlement by developing a range of middle and back office processes that can plug into any distributed ledger technology.

This technology allows the creation of a single shared record for every foreign exchange trade rather than each firm recording its own ledger on multiple systems. These errors are currently fixed manually and as a result the use of technology cuts costs in areas such as affirmation matching, credit maintenance and monitoring and aggregation.

Clients can choose how to integrate their own systems with Cobalt, which can then connect to CLS or another settlement system. Patten explained that Cobalt supports messages for every type of FX transaction for any market participant.

“The Cobalt technology stack can handle one million messages a second,” he added. “Some clients using Cobalt execute 8 million transactions a day.”

He continued that Cobalt has been working with IHS Markit for a year to put connectivity in place and ensure that the platform is sufficiently scalable.

Integration between MarkitSERV and Cobalt is already complete, with trade data flowing from customers and trading venues via MarkitSERV into the Cobalt platform.

“FX post-trade infrastructure could change in days or weeks,” Patten added. “The scope for growth is massive as FX post-trade infrastructure is so fragmented and the industry could save billions of dollars.”

Leaver said: “We expect to see substantial traction in 12 months and scale in the broader FX community. The snowball has started rolling and is gathering pace.”

Future of FX

Investment banking, and the FX market in particular, are entering the next phase of transformation according to a report, FX Business of the Future, in December last year. The global FX Division of the Global Financial Markets Association commissioned Ernst & Young to survey how the FX market landscape could develop over the next decade.

The industry faces the challenges of lower growth in FX revenues; increased regulatory capital requirements; and conduct issues leading to the desire to simplify controls and increase transparency. The survey found that most survey participants believe the way technology is used in the FX market will change.

“In particular, big data and analytics is seen as the most impactful new technology for front-office and client related activities, and distributed ledger technology and robotics are anticipated as being the most impactful new technologies for back-office processes in the next five years and beyond,” said the report.

The survey continued that most respondents believe in the potential rise of technology firms, and non-bank entities’ role in FX.

‘Tech domination in some elements of the FX business is expected, though most likely at a later stage,”added the study. “54% of survey participants believe this will take at least 10 years and, based on qualitative feedback from the surveys and interviews, will most likely be limited to straightforward FX spot products.”

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