Markit to Launch Cash FX Affirmation Service03.17.2016
Markit, the financial information services provider, has launched a service allowing banks to affirm over-the-counter foreign exchange trades executed by interdealer brokers and will extend the platform to the larger cash market this year.
Matthew Hill, director of business development in Markit’s FX business, told Markets Media: “The platform allows banks to see all interdealer broker affirmations on one platform and for brokers to view all their affirmations with banks on one platform.”
Hill said clients wanted a service in the FX market similar to MarkitSERV for interest rate swaps. MarkitSERV launched 14 years ago to provide legal trade confirmation and life cycle event management and then expanded to include access to regulatory reporting, clearing and SEF trading. MarkitSERV also provides buyside functionality such as trade allocation and facilitates reconciliation, including netted positions with central clearers.
The MarkitSERV FX Broker Affirmation service reduces operational risk by replacing paper or voice-based processes to check the accuracy of data before transactions are processed into trading and risk systems.
Robin Wemyss, global head of FX Options at JP Morgan, said in a statement: “Centralising trade affirmation for OTC FX is an important step in improving post trade operations. Trade execution in FX is fragmented across multiple brokers and other venues and we welcome innovation such as this that helps us consolidate systems and streamline operations.”
“There are gaps in straight-through processing in the FX market,” added Hill. “We are starting with options and will expand to cash in quarter two.”
Hill estimated that options are approximately 5% of the $5 trillion-per-day FX market, with the spot market comprising approximately 90% of volumes. “By the end of this year we would expect to have the G14 dealers and Tier 1 and Tier 2 brokers using the FX affirmation service for options and cash,” he added.
Five interdealer brokers are already using the FX affirmation service – BGC, GFI, Tullett Prebon, Nittan and Tradition – while two more are signed and in testing. Four banks, including JP Morgan, are live and four more are signed and in testing
Hill said: “In the last couple of months there has been a massive uptick in interest and volumes on the FX affirmation platform.”
In January the FX affirmation service had 1,000 trades, in February volumes increased to 4,000 trades and volumes have already doubled this month.
Chanelling activity through one platform should also make it easier for clients to monitor whether they are achieving best execution. Spot foreign exchange trading is not covered by Markets in Financial Instruments Directive II, the incoming regulations covering European financial markets from 2018. However as MiFID II expands best execution requirements to non-equities and fund managers will start compiling quantitative evidence for best execution across other asset classes, they are also likely to review spot FX, even though it is not mandated.
For example, US asset manager Russell Investments has created RFX Network, a platform to improve transparency and avoid issues regarding bank-run FX platforms. The RFX Network nets trades at a mid-point price, rather than the standard industry practice of combining buys and sells in a single block trade.
Russell runs an agency-only FX program for its clients such as other asset managers, insurers, and pension funds. Orders are sent by clients to Russell’s central FX desk and are collected for a short period of time and netted. The residual is traded competitively with over 20 non-affiliated banks.
Markit’s affirmation service marks a further expansion in FX following its acquisition of DealHub, which provides foreign exchange trade processing and trading services, last year. Last August Markit also announced the launch of its trade confirmation service for FX options, which will eventually be combined with the affirmation platform. The confirmation service replaced manual processes such as chat, email or the phone by automatically generating legally binding trade confirmations from matching option trade terms.
Consultancy Celent said in a report on FX trading last November that the cycle of change in foreign exchange accelerated in 2015.
The report said: “The rise of megaplatforms for FX has created various liquidity pools, market protocols, pricing, TCA, and analytics delivered through client access to single portals. The concept of single dealer platform ]and multi-dealer platform is blurring and being replaced by better APIs, routing, and aggregation technology that access liquidity. Firms that supply connectivity, aggregation, risk and access to quoting stand to have the greatest competitive advantage.”
Featured image via COSPV/Dollar Photo Club
Richard Turner of Insight Investment sees more automation and more transparency around cost and outcomes.
Nearly all cleared activity is in non-deliverable forwards (NDFs).
CLSNet standardizes and centralizes post-trade processes across FX.
The two platforms will link trading workflows in emerging markets bonds and currency swaps.
FX clearing offers operational efficiencies and credit intermediation.