By James Cusack, Global Head of Sales, Caplin Systems
By viewing the greater transparency demanded by MiFID II as an opportunity to create more intelligent relationships with their FX clients, I believe banks can win more business with leaner sales teams.
It is understandable that some market participants have viewed the implementation of the MiFID II rules with trepidation given that they are required to provide a greater degree of detail around their trade execution.
It used to be the case in a dealing room that a client would phone a sales person and ask them for a price. The sales person would then stand up and say ‘I have client X on the line looking to do five million euro to dollar – what is the price?’
Now the majority of requests have to be anonymous and the price is based on the size of the trade rather than the identity of the client. In reality, if a large client calls a sales person they will still make sure the trader gives them the very best possible price, but there are now pre-agreed parameters via which the price is constructed based on the client profile and the type of trade they are doing.
For example, for a hedge fund that is speculatively buying and selling currency the trader will need to add a layer of spread to ensure that as and when the hedge fund rings the other banks on its list to do that trade elsewhere, the trader is covered in the market.
It is understandable that traders want to see the same level of transparency in FX that they see in equity or fixed income trading, even though as a primarily over-the-counter or OTC market, FX lacks the inherent transparency of a centralised market.
Technology has a role to play in improving accountability. For example, the rates received by the traders who use smart trading systems are based on prices from across the market so they can see how the spread has been calculated.
This is important because FX traders typically have multiple tiers of clients and could at some future point be asked to justify the spread applied to each of these client groups. If a regulator were to ask years later why a particular quote was priced as it was, the trader could show where the market was and how the sales spread was calculated.
As mentioned above, smart trading systems do not prevent sales people from offering certain clients better prices – they simply ensure that pricing is tracked and recorded and enable the sales person to include an explanation of why they changed the spread.
This is significant because banks are facing unprecedented pressure on costs. Margins are shrinking and as a result headcount is falling, so it is vitally important for FX sales desks to be able to justify their existence.
The FX market has moved towards a self-service, electronic model, which has been accelerated by the poor behaviour of some sales and trading staff in the past,
The majority of trades that go through in banks now are auto-quoted by the trading desk by an algorithm, auto-quoted by the sales desk to the client and confirmed, executed and settled without anyone in the back office even seeing it.
As there is less human involvement in the trade life cycle, banks don’t need so many sales staff. Those that remain are more akin to quants in that they have opinions on where the market is going and can back up those opinions based on research.
They are contacting clients rather than waiting for clients to contact them and smart trading systems support this by enabling sales staff to schedule activity. They can then ask clients whether rather than doing their trade as a spot deal or a vanilla forward, they might want to talk to the bank’s derivatives desk about currency options.
More intense hedging strategies still tend to be discussed with a sale specialist over the phone, who might be one of only a handful of people fulfilling this role in each bank.One of the most effective means of underlining the importance of these sales people is to improve efficiency. This can be achieved by getting clients to self-serve but having a management information system to demonstrate value and proactivity in increasing margin/wallet share.
Trading systems used to be only for deal capture – the users would have separate risk analytics, credit and management information platforms. By moving elements of all these functions into a single trading system, when the client calls the sales team a high-level decision support window will pop up and show the average deal size of the client, the last five trades they completed and their profitability.
This gives the sales person the information to make an informed decision on where they should price the client.When a sales person looks at a credit system, most of the time all they are checking is whether they have enough credit to do the trade. Smart trading systems raise a flag when the client is close to reaching their limit in one of their currency accounts or their overall credit limit, enabling the sales person to discuss strategies that could be used to reduce their outstanding balance in credit.
These developments enable client trades to be attributed even if they are done on a self-service basis, increasing the visibility of eFX across the investment banking arm by highlighting the profitability of the sales desk relative to its more modest headcount.
Compliance with MiFID II comes at a cost. However, intelligent institutions are overcoming budgetary constraints by using the compliance budgets allocated to MiFIDII to re-tool existing systems to the overall benefit of the user.
In conjunction with the Global Code of Conduct, MiFID II has created a more level playing field within the FX industry. The ability to demonstrate full compliance is vital to maintaining market credibility and will also serve to limit the impact of firms who have used technology to distort the market.
Barclays announces new trade finance platform for corporate clients
Barclays Corporate Banking has today announced that it is working with CGI to implement the CGI Trade360 platform. This new platform will provide an industry leading end-to-end global trade finance solution for Barclays clients in the UK and around the world.
With the CGI Trade360 platform, Barclays will provide clients with greater connectivity and visibility into their supply chains, allowing them to optimise working capital efficiency, funding and risk mitigation. By utilising cloud based functionality for corporate banking clients, Barclays will also be able to offer a leading client user experience through easy access and real-time integration to essential information, combined with the latest trade solutions as the industry-wide shift to digitisation continues to accelerate.
This move underpins Barclays commitment to supporting the trade and working capital needs of their clients and reinforces a commitment to innovation that has been central to the bank for more than 300 years.
James Binns, Global Head of Trade & Working Capital at Barclays, said: “We are delighted to announce our move to the CGI Trade360 platform and to have started the implementation process. We have a longstanding partnership with CGI, and the CGI Trade360 platform will mean we can continue delivering the best possible trade solutions and service to our clients for many years to come.”
Neil Sadler, Senior Vice President, UK Financial Services, at CGI, said: “Having worked closely with Barclays for the last 30 years, we knew we were in an excellent position to enhance their systems. Not only do we have a history with them and understand how they work, but part of the CGI Trade360 solution includes a proof of concept phase, which is essentially seven weeks of meetings and workshops with employees across the globe to guarantee the product’s efficiency and answer all queries. We’re delighted that Barclays chose to continue working with us and look forward to supporting them over the coming years.”
What’s the current deal with commodities trading?
By Sylvain Thieullent, CEO of Horizon Software
The London Metal Exchange (LME) trading ring has been the noisy home of metals traders buying and selling for over a hundred years. It’s the world’s oldest and largest metals market and is home to the last open outcry trading floor. Recently however, the age-old trading ring, though has been closed during the pandemic and, just a few weeks ago, the LME announced that it will remain so for another six months and that it is taking steps to improve its electronic trading. This news fits in with a growing narrative in commodities about a shift to electronic trading that has been bubbling away under the surface.
Something certainly is stirring in commodities. The crisis has affected different raw materials differently: a weakening dollar and rising inflation risks bode well for some commodities with precious metals being very attractive, as seen by gold reaching all-time highs. Oil on the other hand has had a tough year and experienced record lows from the Saudi-Russia pricing war. It has been a turbulent year, and now prices look set to soar. While a recent analyst report from Goldman Sachs predicts a bullish market in commodities for the year ahead, with the firm forecasting that it’s commodities index will surge 28%, led by energy (43%) and precious metals (18%).
Increasingly, therefore, it seems that 2020 is turning out to be a watershed moment for commodities, and it’s likely that the years ahead will bring about significant transformation. And whilst this evolution might have been forced in part by coronavirus, these changes have been building up for some time. Commodities are one of the last assets to embrace electronic trading; FX was the first to take the plunge in the 90s, and since then equities and bonds have integrated technology into their infrastructure, which has steadily become more advanced.
The slow uptake in commodities can be explained by several truths: the volumes are smaller and there is less liquidity, and the instruments are generally less exotic, essentially meaning it has not been essential for them to develop such technology – at least not until now. This means that, for the most part, the technology in commodities trading is a bit outdated. But that is changing. Commodities trading is on the cusp of taking steps towards the levels of sophistication in trading as we see in other asset classes, with automated and algo trading becoming ever prominent.
Yet, as commodities trading institutions are upgrading their systems, they will be beginning to discover the extent of the job at hand. It’s no easy task to upgrade how an entire trading community operates so there’s lots to be done across these massive organisations. It requires a massive technology overhaul, and exchanges and trading firms alike must be cautious in the way they proceed, carefully establishing a holistic, step-by-step implementation strategy, preferably with an agile, V-model approach.
The workflow needs to be upgraded at every stage to ensure a smooth end-to-end trading experience. So, in replacement of the infamous ring, these players will be looking to transform key elements of their trading infrastructure, including re-engineering of matching engines and improving communications with clearing houses.
However, these changes extend beyond technology. For commodities players to make a success of the transformation in their community, exchanges need to have highly skilled technology and change the very culture of trading. All of which is currently being done against a backdrop of lockdown, which makes things much more difficult and can slow down implementation.
What is clear is that coronavirus has definitely acted as a catalyst for a reformation in commodities. It is a foreshadowing of what lies ahead for commodities trading infrastructure because, a few years down the line, commodities trading could well be very different to how it is now, and the trading ring consigned to history.
Afreximbank’s African Commodity Index declines moderately in Q3-2020
African Export-Import Bank (Afreximbank) has released the Afreximbank African Commodity Index (AACI) for Q3-2020. The AACI is a trade-weighted index designed to track the price performance of 13 different commodities of interest to Africa and the Bank on a quarterly basis. In its Q3-2020 reading, the composite index fell marginally by 1% quarter-on-quarter (q/q), mainly on account of a pull-back in the energy sub-index. In comparison, the agricultural commodities sub-index rose to become the top performer in the quarter, outstripping gains in base and precious metals.
The recurrence of adverse commodity terms of trade shocks has been the bane of African economies, and in tracking the movements in commodity prices the AACI highlights areas requiring pre-emptive measures by the Bank, its key stakeholders and policymakers in its member countries, as well as global institutions interested in the African market, to effectively mitigate risks associated with commodity price volatility.
An overview of the AACI for Q3-2020 indicates that on a quarterly basis
- The energy sub-index fell by 8% due largely to a sharp drop in oil prices as Chinese demand waned and Saudi Arabia cut its pricing;
- The agricultural commodities sub-index rose 13% due in part to suboptimal weather conditions in major producing countries. But within that index
- Sugar prices gained on expectations of firm import demand from China and fears that Thailand’s crop could shrink in 2021 following a drought;
- Cocoa futures enjoyed a pre-election premium in Ghana and Côte d’Ivoire, despite the looming risk of bumper harvests in the 2020/21 season and the decline in the price of cocoa butter;
- Cotton rose to its highest level since February 2020 due to the threat of storm Sally on the US cotton harvest, coupled with poor field conditions in the US;
- Coffee rose 10% as La Nina weather conditions in Vietnam, the world’s largest producer of Robusta coffee, raised the possibility of a shortage in exports.
- Base metals sub-index rose 9% due to several factors including ongoing supply concerns for copper in Chile and Peru and strong demand in China, especially as the State Grid boosted spending to improve the power network;
- Precious metals sub-index, the best performer year-to-date, rose 7% in the quarter as the demand for haven bullion continued in the face of persistent economic challenges triggered by COVID-19 and heightening geopolitical tensions. In addition, Gold enjoyed record inflows into gold-backed exchange traded funds (ETFs) which offset major weaknesses in jewellery demand.
Regarding the outlook for commodity prices, the AACI highlights the generally conservative market sentiment with consensus forecasts predicting prices to stay within a tight range in the near term with the exception of Crude oil, Coffee, Crude Palm Oil, Cobalt and Sugar.
Dr Hippolyte Fofack, Chief Economist at Afreximbank, said:
“Commodity prices in Q3-2020 have largely been impacted by COVID-19. The pandemic has exposed global demand shifts that have seen the oil industry incur backlogs and agricultural commodity prices dwindle in the first half of the year. The outlook for 2021 is positive however conservative the markets still are. We hope to see an increase in global demand within Q1 and Q2 – 2021 buoyed by the relaxation of most COVID-19 disruptions and restrictions.’’
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