There's nothing as certain as change

A review of the key events of the past 12 months (pages 4 to 15) illustrates an industry calling for change. As an increasingly diverse pool of investors, from hedge funds and real money managers to retail traders, piles into the foreign exchange market for profit generation, the pressure being felt by incumbent systems and infrastructure has become hard to ignore.

Chiefly, the strain is on the back offices of major dealers and prime brokers, which are now having to process surging ticket volumes of declining notional sizes from algorithmic traders and retail traders. To put things in perspective, online trading company FX Solutions' co-founder and co-chief executive Thomas Plaut said his company typically sees 100,000 tickets a day at around $70,000 each.

Businesses such as these have forced the debate over pre-settlement netting by dealers, to limit the volume of tickets being processed at the back office and to avoid having to make the investments to enlarge capacity. Over the past year, post-trade technology vendors such as Icap-owned Traiana and Options Computers developed systems for banks to net trades pre-settlement.

But while these solutions exist, their use could be limited by rules governing industry settlement system CLS that require trades to be settled on a gross basis. Indeed, market pressure led CLS to consider offering a solution to net trades pre settlement - although the idea was eventually rejected. Instead, it has launched a warehouse solution that enables banks to data-manage daily trade positions and then aggregate them to find their net exposure, which is then processed by the back office.

It's still too early to know the success of these solutions. What is clear, though, is that the problem is very real. And with any problem comes an opportunity for those that want to take advantage of it. Last year the market called for a reduction in settlement costs while ensuring Herstatt risk is minimised, and the technology is now ready. Watch this space.