Barracuda FX Predicts FSB Recommendations Will Lead Banks to Automate eFX Order Management

Barracuda FX, an Ireland-based Order Management Systems (OMS) provider to the FX industry, predicts that the Financial Stability Board (FSB) will push banks to adopt new technological methods of handling their eFX business.

The FSB is a multinational entity designed to observe and help facilitate transparency and compliance measures for market participants across 24 countries. In late September, the FSB released the final and latest version of its report dealing with FX benchmarks, along with supplemented recommendations for notable measures for reform of the FX markets. The report dealt with the WM/Reuters (WMR) 4PM London fix following the global Forex rates manipulations investigations.

Many banks are using work-arounds and manual processes to supplement internal system failings when dealing with benchmark orders. These are error prone, expose operational risk and lack the necessary controls. Barracuda FX says that electronic management in a system specifically designed for managing benchmark orders would address many of the recommendations highlighted in the FSB report.

The recent FSB recommendations on FX Benchmarks outlined a set of recommendations to be implemented by market participants to improve market structure and conduct. According to Kieran Fitzpatrick,CEO of Barracuda FX. while a number of the recommendations focus on changes in practices and adherences to codes of conduct, many are driven by technology changes. “Technology and automation will address many of the recent FSB recommendations around Fixing." says Mr. Fitzpatrick.

“Many of the improvements brought about by eFX technology over the past 5 years have tended to focus on pricing, distribution and market Risk Management . Our view has always been that every transaction is an order and appropriate technology and systems are crucial to effectively managing them. However, this view isn’t particularly mainstream, and automating order management hasn’t been the highest priority for eCommerce investments within banks.

But with the recent FSB recommendations this will change. Netting and execution facilities for benchmark orders, transparency around transactions, internal order management and privacy requirements will be core to an institution’s integrity in handling benchmark orders going forward – and the easiest and most cost-effective way to do this is through the right technology and systems. Another interesting period ahead in the eFX revolution.”

Addressing Highlighted FSB Recommendations

Forex Magnates asked Barracuda FX how a platform like theirs can enhance bank controls and process points around benchmark orders and they explained to us how it works with some central recommendations, such as:

FSB Recommendation No. 6 - Independent netting and execution facilities for transacting fix orders. “The group supports the development of industry-led initiatives to create independent netting and execution facilities for transacting fix orders.” This refers to the netting of benchmark orders in the interbank market pre-fix (pre 4pm). It means that banks should be able to net their orders off against each other such that only the residual enters the market. With its Order Hub module, Barracuda FX currently offers banks the opportunity to exchange orders – for example to cover gaps in their out-of-hours coverage or currency specialization. The firm said it is working with a number of clients to extend this functionality to incorporate the ability to net and pass benchmark orders. For example, a regional bank could still electronically handle client benchmark flow but anonymously net this exposure and have any residual risk handled by another Order Hub bank. Barracuda FX also allows individual clients who have multiple orders for an individual fix to net their own orders against each other so that they do not have to pay the spread on each order individually and only pay the spread on the net position they have at the fix.
FSB Recommendation No. 7 - Transparency around fixing transactions and mark-up management. “The group recommends that fixing transactions be priced in a manner that is transparent and is consistent with the risk borne in accepting such transactions. This may occur via applying a bid-offer spread, as is typical in FX transactions, or through a clearly communicated and documented fee structure such as a direct fee or contractually agreed price. This should occur in the context of dealers having committed to the internal process reforms and codes of behaviour detailed below." There are two aspects to this. Until now, fixing orders have generally been executed at the mid-market rate with little or no mark-up. This recommendation outlines changing to one of 2 options – order execution at the mid-market rate but with a pre-agreed mandated brokerage charge (aka mark-up) or order execution at the bid-ask spread with or without a brokerage change. Both these configurations are available in Barracuda and the bank can control whether a client is executed at the mid or the bid/ask spread and whether a client mark-up should be applied on top of the mid/bid-ask spread. A complete audit trail and reporting to clients is immediately available so there is total visibility around the transactions and mark-up management.
FSB Recommendation No. 8 - Internal controls for handling of orders and controls within the banks. “The group recommends that banks establish and enforce their internal guidelines and procedures for collecting and executing fixing orders including separate processes for handling such orders.” This means that a bank should have controls and audits in place so that there is an audit trail of who had knowledge of benchmark orders before they were executed, who entered the order as it came in etc. Until now a lot of this has been done manually, eg written down or on excel spreadsheets by individual traders, but on Barracuda FX, once entered into the system a full audit trail is available which specifically registers who entered the order, times, when it was executed etc, so there is complete transparency and accountability around all orders.
FSB Recommendation No. 11 - Internal systems for managing customer flow. “More broadly, the group recommends that banks establish and enforce their internal systems and controls to address potential conflicts of interest arising from managing customer flow.” This means that banks should ensure that benchmark orders are not seen by the entire FX team so that there is no opportunity for traders to manipulate prices in advance of the 4pm fix. Barracuda FX allows banks to segregate benchmark orders from the rest of the FX flow while still allowing management to have complete oversight of the global order book in order to manage their overall risk positions. Permission to view and execute on the benchmark orders can be limited to only those accountable individuals, and not included as part of the bank’s regular flow.

Addressing Highlighted FSB Recommendations

FSB Recommendation No. 6 - Independent netting and execution facilities for transacting fix orders. “The group supports the development of industry-led initiatives to create independent netting and execution facilities for transacting fix orders.” This refers to the netting of benchmark orders in the interbank market pre-fix (pre 4pm). It means that banks should be able to net their orders off against each other such that only the residual enters the market. With its Order Hub module, Barracuda FX currently offers banks the opportunity to exchange orders – for example to cover gaps in their out-of-hours coverage or currency specialization. The firm said it is working with a number of clients to extend this functionality to incorporate the ability to net and pass benchmark orders. For example, a regional bank could still electronically handle client benchmark flow but anonymously net this exposure and have any residual risk handled by another Order Hub bank. Barracuda FX also allows individual clients who have multiple orders for an individual fix to net their own orders against each other so that they do not have to pay the spread on each order individually and only pay the spread on the net position they have at the fix.
FSB Recommendation No. 7 - Transparency around fixing transactions and mark-up management. “The group recommends that fixing transactions be priced in a manner that is transparent and is consistent with the risk borne in accepting such transactions. This may occur via applying a bid-offer spread, as is typical in FX transactions, or through a clearly communicated and documented fee structure such as a direct fee or contractually agreed price. This should occur in the context of dealers having committed to the internal process reforms and codes of behaviour detailed below." There are two aspects to this. Until now, fixing orders have generally been executed at the mid-market rate with little or no mark-up. This recommendation outlines changing to one of 2 options – order execution at the mid-market rate but with a pre-agreed mandated brokerage charge (aka mark-up) or order execution at the bid-ask spread with or without a brokerage change. Both these configurations are available in Barracuda and the bank can control whether a client is executed at the mid or the bid/ask spread and whether a client mark-up should be applied on top of the mid/bid-ask spread. A complete audit trail and reporting to clients is immediately available so there is total visibility around the transactions and mark-up management.
FSB Recommendation No. 8 - Internal controls for handling of orders and controls within the banks. “The group recommends that banks establish and enforce their internal guidelines and procedures for collecting and executing fixing orders including separate processes for handling such orders.” This means that a bank should have controls and audits in place so that there is an audit trail of who had knowledge of benchmark orders before they were executed, who entered the order as it came in etc. Until now a lot of this has been done manually, eg written down or on excel spreadsheets by individual traders, but on Barracuda FX, once entered into the system a full audit trail is available which specifically registers who entered the order, times, when it was executed etc, so there is complete transparency and accountability around all orders.
FSB Recommendation No. 11 - Internal systems for managing customer flow. “More broadly, the group recommends that banks establish and enforce their internal systems and controls to address potential conflicts of interest arising from managing customer flow.” This means that banks should ensure that benchmark orders are not seen by the entire FX team so that there is no opportunity for traders to manipulate prices in advance of the 4pm fix. Barracuda FX allows banks to segregate benchmark orders from the rest of the FX flow while still allowing management to have complete oversight of the global order book in order to manage their overall risk positions. Permission to view and execute on the benchmark orders can be limited to only those accountable individuals, and not included as part of the bank’s regular flow.