Product Manager, Director, Order Manager, SimCorp
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Chief Revenue Officer, BidFX
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Read the article and learn about:
- The evolving FX market from MiFID II to the turbulence of 2020
- The growth of FX in long-only institutional investment
- How a consolidated OEMS workflow can deliver operational resilience
- Why FX in a multi-asset class OEMS, improves risk management
Foreword by Matthew Reid, Product Manager, Director of SimCorp’s Order Manager solution.
With its far-reaching remit, MiFID II reshaped European institutional financial markets, with a series of measures that sought to address and improve Over The Counter (OTC) market transparency. Following the third anniversary of this landmark regulation, we take a look at the subsequent impact on the Foreign Exchange (FX) market, including rapid electronification, which has seen FX become one of the world’s most electronically traded asset-classes.
With an average of 80% of global transactions traded electronically, the FX market covers a number of instruments from Deliverable and Non-Deliverable FX forwards and Swaps, FX Options, and other FX derivatives, all of which come under the MiFID II instrument classification. Since 2018 and instigated by the European regulation, FX desks have made the move from a heavily manual order and execution process, to ensure an operationally effective approach that can demonstrate best execution and transaction reporting, while also accessing algorithms to enable an alternative source of liquidity to the classic RFQ approach. At the same time, the market has adopted innovation, in the form of cloud platforms, machine learning and even AI-enhanced workflows that work hand in hand with human talent.
While in the past, regulation may have been one driver for change, this year we have seen an altogether different force at play. The turbulence caused by the global pandemic had a significant impact on the FX market, creating unprecedented levels of volatility. The global uncertainty that ensued, led to a vicious cycle of dwindling appetite for risk and diminishing liquidity. While no market was left unturned, electronic trading provided some relief at least for FX, proving itself capable of delivering the scale needed, as firms found themselves both stretched by peak trading volumes and physically scattered across the world.
What is interesting is that while FX desks had the advantage of electronic trading and algos, over other asset classes, the crisis earlier in the year also saw a return to voice calls, as long-standing sell-side relationships were called upon in the scramble for liquidity. According to Greenwich Associates1, two-thirds of FX market participants interviewed in their recent study said relationships became more important during the COVID-19 crisis, as the entire the FX ecosystem underwent a plunge in liquidity. While the two approaches – voice and electronic - may seem at odds with each other, Ken Monahan, Greenwich Associates summarizes that: “In reality, both can be true at the same time. The crisis demonstrated that, in extreme volatility, market participants need both relationships they can count on and effective alternative tools for sourcing liquidity and executing trades.”
Although much of the FX market has now returned to a new normal, with FX desks operating in a remote working COVID-19 environment, many firms including those lagging behind, are beginning to understand the value of electronification or digitalization, from execution and liquidity sourcing, to Transaction Cost Analysis (TCA) and more. At the same time, the rise of the OEMS, where Order Manager and Execution Management systems are consolidated to deliver firms a rich and holistic front office suite, has also demonstrated its ability to achieve improved operational efficiency, a valuable commodity under extreme market duress.