The Value Proposition of Electronic Dealing

by Neill Penney, Head of FX Workflow, Thomson Reuters, with Priscilia Bouton Peignoux, Financial Markets Director and Cyril Merkel, Financial Risk Manager, Sanofi S.A.

In a globalised trade world, currency conversion is becoming a constant in almost any commercial exchange. It is not only a necessary step in the payment process but also a risk mitigation and hedging instrument for corporate treasurers, according to Aite’s 2015 report on business-to-business FX transactions. But with regulation and uncertainty in financial markets continuing to be a major catalyst for change and stress in FX markets, many corporate treasurers are finding it challenging to maintain optimal levels of liquidity and cash flow profiles for their companies. The need to automate FX for operational efficiency is no longer optional for treasurers, but obligatory.

In this feature, Neill Penney, Head of FX Workflow at Thomson Reuters, discusses some of the trends and developments in electronic dealing that benefit the treasury value chain beyond serving as a request for quotation (RFQ) platform. He is joined by Priscilia Bouton Peignoux, Financial Markets Director and Cyril Merkel, Financial Risk Manager of Sanofi S.A. who are long-standing users of FXall.

The value of online FX dealing has become widely recognised across the corporate treasury community, particularly through a bank-independent multi-bank portal. While historically, larger treasury functions with high transaction volumes have been most active in using electronic dealing portals, treasuries of all sizes are now implementing these solutions. At a basic level, it is far easier to obtain multiple quotes through a portal than when dealing by telephone, and to select and transact automatically at the best price. Dealers can then demonstrate best execution as quotes are stored on the transaction for bank performance analysis and reporting. Once the trade has been executed, post-trade processing can take place automatically, either using capabilities within the platform or by integrating seamlessly with treasury management systems (TMS) and treasury modules of enterprise resource planning (ERP) tools.

Extending the benefit

FX dealing platforms such as Thomson Reuters’ FXall have been developed over time to extend their capabilities further into the treasury value chain. For example, subsidiaries are able to request amounts from treasury directly through FXall rather than through a separate TMS or alternative platform. These deal requests are automatically consolidated, presenting dealers with the net positions that need to be transacted. This includes the ability to define detailed rules such as ring-fencing certain entities or currencies to exclude them from netting processes. By extending the concept of straight-through-processing (STP) fom pre-trade to post-trade, clients benefit from unprecedented levels of convenience, security and automation.

Moving to a multibank electronic trading platform for FX enabled Sanofi to enhance price discovery while managing banking relationships and mitigating their risk more effectively. Cyril Merkel, Sanofi comments,

“In the old world, FX trading was a lot more time-consuming and not 100% efficient. We would call a number of banks and would not be certain to get the best price. Then we would manually insert trades in spreadsheets. Having moved to FX all, we were able to keep records of historical data, to get statistics, and more importantly, to be entirely transparent.”

Priscilia Bouton Peignoux continues,

“Having received the daily cash position from middle office, our dealers use FXall to transact its FX requirements. This allows us to connect with each of Sanofi’s 16 partner banks so that they can compete for FX business on an equal basis. Not only do we ensure best price discovery, but by storing competitive quotes on each transaction, we can provide detailed feedback to banks on their relative performance. Deal details, including competitive quotes, are then passed automatically through to KTP, our TMS, avoiding the need to reinput this data.”

While STP and price discovery are amongst the initial reasons why treasurers have chosen to use FX dealing portals such as FXall, the value proposition is becoming more compelling as accounting standards and international banking regulations evolve. In addition, financial markets are becoming more structurally complex and volatile as the Swiss flash crash in January 2015 and the chain emerging market currencies depreciation in August 2015 illustrate. Market volatility and growing regulatory pressures on both banks and corporates is resulting in greater buy side complexity. Some banks are becoming less inclined to act as primary market makers, preferring an agency role. This is an important distinction that their clients need to understand, as it will impact the type of solutions they offer.

Managing complexity and volatility

As the available solutions become less creative, there is greater onus on corporate treasurers to structure effective hedging strategies. For example, while today, FX deal execution is relatively straightforward, in that treasurers will generally seek competitive quotes and deal based on the best price, in the future, it is more likely that treasurers will split deals and either deal tranches with different counterparties, and/or deal at different times, in order to balance market risk with transaction cost. At Thomson Reuters, we are being proactive in developing the next generation of online dealing capabilities, in anticipation of client requirements that are likely to emerge over the next two years.[[[PAGE]]]

Another outcome of growing market complexity and volatility is that corrections to market anomalies are likely to take longer, so treasurers will increasingly require tools that enable them to analyse normal versus abnormal volatility and pinpoint the options available to them. Thomson Reuters’ solution Eikon, for example, already provides liquidity heat maps and options modelling to allow treasurers to capture asymmetric risk and perform portfolio evaluation.

Beyond foreign exchange

Clients are not only seeking deeper, richer functionality through their dealing platforms, but also a broader range of instruments. FX instruments are typically the priority for most treasurers in that transaction volumes are higher and market volatility is greater. However, a growing number of companies are seeking to extend the same automation, cohesion and auditability in pre-trade, transaction and post-trade processing as they enjoy for FX transactions to other instrument types. The most popular requirement is for loans and deposits, which are fully supported in FXall, as Sanofi’s experiences illustrate. Priscilia Bouton Peignoux, Sanofi notes,

“With a growing trend towards electronic over telephone dealing, we recognise the benefit of a more automated and auditable approach to transaction execution and STP across a wider spectrum of instruments. In addition, we greatly value our daily interaction with relationship banks, and see the value in repositioning these relationships based on value-added services rather than daily transaction execution.”

The value proposition of electronic dealing is compelling for both banks and corporate treasuries. For banks, costs are reduced, and deal pricing and execution with clients is auditable. For corporations, transparent and auditable price discovery, and the ability to achieve a high level of both pre-trade and post-trade STP means that the use of FX dealing portals has effectively become obligatory rather than optional. Furthermore, the business case is likely to become even stronger in the future as market and regulatory conditions evolve, with treasurers expected to validate their dealing conduct as well as demonstrate price discovery. Solutions such as FXall, alongside Thomson Reuters’ sister solutions such as Eikon, support both banks and corporate treasurers in their dealing, STP, compliance and integration objectives, and provide a powerful platform to manage evolving future requirements.