The global FX problem demanding a local solution

Andrew Wood, business development manager at CMC Institutional, outlines the key considerations for firms seeking a liquidity provider, focusing on the importance of a strong local presence and how a comprehensive understanding of local customs and regulations in multiple jurisdictions can help a provider build its name globally.

While the foreign exchange industry has been through a turbulent patch in recent years, navigating a raft of changes from capital adequacy and regulation to the internalisation of flow, there has been no shortage of entities willing to step forward and try to fill the gaps in service that have emerged. 

In today’s always-on, 24/7‑connected world, it is easy to believe that as long as a counterparty passes traditional due diligence processes there’s absolutely no reason not to do business together. Whether a Wall Street behemoth or the next great tech challenger, it’s vital not to underestimate the value of having local resources – with the autonomy to make things happen – on hand when you need them. Andrew Wood, business development manager at CMC Institutional in Sydney, explains why local support can still make a difference in the world of FX.

 

How does a local presence impact onboarding?

Andrew Wood, CMC Institutional: Opinions are divided on this matter. While some say it makes no difference – scheduling conference calls or jumping on a plane to iron out the pre-sales process is no significant challenge – there remain significant benefits to having a physical presence in a region, plus a proper understanding of local customs and regulations.

Even though this is a relatively tight-knit community – whether your office is down the street or on the other side of the globe, counterparties may already be familiar with one another – local knowledge can make a real difference in the start-up phase, with even more significant benefits being recognised over the lifetime of the relationship.  

 

In terms of hard product, what should clients be looking for in a liquidity provider?

Andrew Wood: You want this process to be wholly transparent and as seamless as possible, so ensure the full range of assets you want access to are available from the liquidity provider. Further, check where that liquidity is coming from. Is it genuine, direct tier one flow, or is it being recycled from other prime brokers? If it’s the latter, there’s a heightened risk that orders – especially regarding large positions in a faster-moving market – could end up being contested and with more steps in the chain; pricing has the potential to suffer too.

A liquidity provider with an established track record, multiple-jurisdiction regulation and a healthy balance sheet, possibly supported by a public market listing, is also far more likely to be in a position to strike and maintain critical tier one relationships that are fundamental in allowing access to flow at scale.

You should also ask what technology is on offer. Can you take the liquidity over a standard financial information exchange connection on an application programming interface (API), or do you need support in terms of interface technology? Liquidity providers offering a choice of service here are again likely to appeal to the widest-possible market and come with a degree of future-proofing for clients too. 

As businesses grow, requirements may change, either in terms of the universe of tradable assets, the delivery of the flow or the nature of the management reporting necessary on a day-to-day basis. Working with a provider who can offer the maximum degree of future proofing – while also being confident they will continue to maintain and invest in their technology – should be seen as an astute move. Failure to do so runs the risk of a counterparty being unable to scale its operation in a seamless manner. CMC Institutional offers clients either just the flow delivered over an API, or an institutional-grade trading graphical user interface, complete with real-time position monitoring.

 

What is important in the soft side of the product – the user experience?

Andrew Wood: This is where the need for support will potentially be at its greatest. Through the set-up phase, liquidity providers will typically be keen to ensure everything works so the broker starts taking their flow, but ensuring assistance is available beyond the first few orders is vital. It’s worth bearing in mind that, increasingly, liquidity providers will allow that to be done at least to some extent on a self-serve basis, so it’s important for clients to understand exactly what they can control. Again, certain providers – including CMC Institutional – allow liquidity to be sculpted to meet a client’s precise needs. Do they want to prioritise certain sources of liquidity to maintain existing upstream relationships? Does that require taking a different structure for certain client counterparties? This can become incredibly cumbersome and time-consuming for the liquidity provider to configure, so the ability for a liquidity taker to easily fine-tune this through an intuitive portal can again help make significant time savings while keeping overheads in check.

 

What happens in more complicated situations?

Andrew Wood: This is where the local support function really comes into its own. Whether it’s a minor technical issue, a nuanced regulatory question, adding new niche assets such as local equity contracts for difference or quickly resolving a question about funds transfers, you don’t want the default position to be a 24-hour delay simply because the problem can only be addressed by an office located in a very different time zone.

A number of liquidity providers may just have a single office in Europe, but liquidity provision can be supported far more effectively if there’s a network of staff with the autonomy and the knowledge to put things right quickly.

Whether our clients are simply being delivered CMC’s flow using a FIX API, using our institutional management reporting tools or taking our Prime FX and Prime Derivatives services, it’s important to stress that we have built all these systems to be as self-sufficient as possible. However, the reality is that the financial industry is always in a state of evolution so the need for a degree of human interaction and specialist knowledge – quite likely at a local level – can never be overcome.  

This reality means CMC Institutional has expert staff in venues located across the globe, allowing local support to be provided as and when it is required, speeding up many resolutions for our clients.

What about the future? Will systems converge to make it easier to provide these services on a global basis? 

Andrew Wood: There’s definitely some suggestion that regulatory approaches are converging, but it seems unlikely that a wholly homogenous, truly single view will ever be found. After all, it’s important regulators have the ability to set rules that reflect the specific needs of the local market, rather than pursuing a one-size-fits all approach. But it’s also important to bear in mind that regulatory evolution is only part of the challenge being faced by liquidity providers, anyway. 

Local banking processes change, as do local requirements, as both sides need to adapt to what ultimately is a very dynamic underlying market. This all points back to the fact that, if you’re working with a counterparty that employs staff with a reasonable degree of autonomy in your own time zone, then those issues – ranging from the most mundane user error to a potentially rather more complex need for a quick reaction to regulatory change, can be resolved in a more timely manner. 

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