Smarter Trading: Exposing the Real (Time) Benefits

Ever-shrinking margins and a more competitive business environment mean that agility and accuracy are essential when trading financial products. However, many financial institutions still endure high operational risk and opportunity cost by not leveraging this in their credit process. Without accessible, up-to-date credit information, these institutions not only leave themselves vulnerable to losses, but they also negatively impact their trading potential. It is essential that they put an end to this lack of up-to-date information and give their traders and management the insight into real-time credit operations.

Trade volumes have surged and look set to increase further still as a result of algorithmic and electronic trading. According to analyst house Celent, while the foreign exchange (FX) market experienced a substantial decrease in early 2009, with US$2.9 trillion in average daily volume, they estimate the market should exceed US$4 trillion in average daily turnover in 2010.1 TABB Group reinforces this increase, stating that the advent of CLS and the near complete mitigation of FX settlement risks are fuelling this growth.2

With front and middle office resources already stretched, applying appropriate limits and monitoring them against such high volume, fast-paced trading activity is no easy accomplishment. Perhaps even tougher, is determining exposures to counterparties, countries, traders and currencies. Unsurprisingly, in most cases these limit monitoring and credit risk operations simply can’t keep up with the front office. This means that banks often don’t find out what their exposures are until after the trading event.

Applying appropriate credit calculations to aggregated cross-product exposures of heightened volumes of trade activity is, therefore, a significant challenge. These efforts are made even more difficult due to disparate systems, disjointed business lines and a lack of centralised technologies. With legacy or rigid systems in place, institutions cannot communicate data on an enterprise-wide basis in real-time.

As a result of this delayed information, traders and managers lose agility and run the risk of being too conservative – at significant opportunity cost. Too few institutions have achieved real-time visibility and high-performance processing. Those that have, however, are reducing their operational risk and improving their client service.

Real-time, Real Benefits

Ensuring position and exposure information is aggregated across all products and trading platforms – and that this information is available continuously on demand – allows institutions to trade with greater confidence.

The benefits of a real-time solution are highlighted when a trader requests more credit. Credit limits and concentration rules can be managed by trader, by asset class, and by counterparty. With a real-time solution, credit officers can immediately determine what the exposure is and check credit against up-to-date transactional exposures and mark-to-market, using current rates and collateral values. This availability of information will enable a quick evaluation of limits and allow for the appropriate decisions to be made before the trade is committed.

With higher levels of automation and the flexibility to calculate exposures in multiple ways, financial institutions can also benefit from vastly increased efficiencies. Users can create hierarchies of credit structures and view all related information in real-time. For example, when a trading partner rolls up into a particular customer group and that customer group rolls up into an even higher group, accurate, timely information remains visible at all levels.

When up-to-date credit information is consistently available, traders and compliance officers have the tools and data to deal with issues on an intra-day basis, rather than simply reviewing end-of-day risk reports. A continuous view of exposure and the ability to configure and automatically generate workflow alerts and warnings would move limit and position monitoring to an earlier point in the trade lifecycle – increasing effectiveness. Trading limits are therefore less likely to be breached.

With strain on financial institutions to meet increasingly stringent regulatory requirements, more effective credit and limit monitoring will help better meet these demands. It will also demonstrate a more sophisticated and calculated approach to trading. With firms still under scrutiny for reckless trading, this behaviour will help to allay fears.

Global financial institutions that achieve firm-wide data communication will better manage credit and exposures. Gaining these benefits in today’s high-volume, low-margin environment is paramount if financial institutions are to retain business, win business and maintain high client satisfaction.

1 Celent report, ‘Global FX Market Trends: The multi-dealer platforms’.

2 Tabb Group report, ‘Bringing Best Execution to the FX Markets’.

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