Trial by Fire: Why 2020 Will Help the FX Industry in 2021

The working conditions brought on by the pandemic created the environment necessary for innovation in FX trading, writes Vikas Srivastava, Chief Revenue Officer at Integral Development Corp. The increased reliance on technology accelerated existing trends, such as greater adoption of cloud, increased use of algos and mobile trading products.

I think I can say with confidence that 2020 has been the strangest year in my career to date. The FX markets have faced their fair share of geopolitical disruptions over the decades, yet nothing comes close to the impact of COVID-19. While we are not out of the woods yet, there are reasons to be optimistic about 2021. 

As with many other industries, the last ten months has created the necessary conditions for innovation in FX – such as greater adoption of cloud, increased use of algos and mobile trading technology – by accelerating existing trends. Due to enforced lockdowns and distributed workforces, we now have many buy- and sell-side institutions using a greater proportion of electronic and algorithmic trading, relationship-based trading, automated workflows, and off-premise solutions. These trends are gaining pace, ensuring the FX industry has not simply coped but adopted and overcome during these difficult conditions.  

The first sign that things had changed in FX this past year came with the FX Turnover survey results. According to the Bank of England’s semi-annual foreign exchange turnover survey, Single-Dealer Platforms (SDPs) increased their daily share of spot transactions by almost half between April 2019 and April 2020, while MDP volumes fell off compared to the usual predominance in electronic trading. The impact of the pandemic cannot be understated here as volumes surged in March and April, which had an impact on the outcomes 

As people were forced to work from home and their professional circles shrunk due to limited interaction, the importance and stability of bank FX relationships through SDPs allowed FX markets to function with more certainty. On top of this, greater deployment of execution algos – as highlighted by the BIS report – also allowed market participants to navigate the volatile markets and source the best liquidity for their trades. This enabled markets to function better 

It’s a good thing the market is in a position of quiet confidence, as 2021 will not be a walk in the park. Along with contending with a low-rate environment and geopolitical uncertainty, new regulations will be introduced for the first time or as part of previous phases that were postponed due to the pandemic. Both SA-CCRand phase 5 of the uncleared margin rules (UMR) introduce greater cost implications for certain trades and introduce new operational headaches for those operating in OTC markets in particular, such as managing margin with more counterparties and more laborious calculation of counterparty credit risk. 

With unavoidable events appearing on the horizon, banks and brokers of all sizes need to assess their technology to ensure they can continue supporting their clients – in asset management, hedge funds, pension funds and corporates – irrespective of where we are working and the market conditions surrounding us. Cloud technology that is fast-to-implement and offers highly customizable features will allow institutions to keep up with accelerating trends and offer bespoke solutions to clients, all at significantly lower cost and without the need to compromise on quality. 

Having learnt the lessons of the last year, the FX industry is in a strong position to push on again in 2021. To do so successfully, firms will need to maintain their ambition in innovating and introducing cost and operationally efficient technology. If the trends highlighted in the most recent Association for Financial Markets in Europe (AFME) and PwC report are anything to go by, banks will continue to invest in implementing cloud across their workflows, and we can assume FX functions will be included in this. Those that do can fly high up in the clouds – no pun intended 

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Vikas Srivastava is Chief Revenue Officer at Integral Development Corp. Prior to Integral in 2010, Vikas spent 10 years at Citigroup in New York in numerous senior management positions. As global head of e-commerce for the fixed income division, he oversaw the building and distribution of electronic execution products across all fixed income and foreign exchange businesses, and managed Citigroup’s investments in multi-dealer platforms. Prior to Citi, Vikas ran currency trading and risk management at Barclays Global Investors (now BlackRock) in San Francisco. 

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