Overcoming the post-trade dilemma

Despite the market tumult that subprime has brought to us, and however unpredictable volatility and market direction will be, there seem to be a couple of givens in the foreign exchange market.

One is that banks will see continued ticket growth, with Asia and the emerging markets being the main engines. At the same time though, the actual growth rate is lagging behind expectations. This fuels competition and puts additional pressure on already tight profit margins. Decreasing profit margins are abating the effectiveness of pricing strategies, and banks need to find a competitive edge on the service front.

In this environment, clients concentrate their FX spend on service providers that offer the most comprehensive front-to-back service, and customer orientation is a key success factor. But brokers shouldn't fall into the trap of offering service for service's sake, as customer orientation without profit alignment is pointless.

The post-trade dilemma therefore can be summarised as follows: growing ticket volumes and decreasing profit margins are forcing banks to further roll out straight-through processing (STP) solutions, improving the ability to process ever-increasing foreign exchange volumes and decrease settlement costs. At the same time, an increasingly heterogeneous customer base is demanding more and more value-add services tailored to their specific needs, while expecting a general increase in service level. Reality shows that these services and this heterogeneity decreases the STP rate and is especially labour-intensive for operations teams.

To avoid being pushed into a niche, offering boutique services to a specific client segment, banks will need a plan to get themselves out of this dilemma.

When trying to solve this post-trade problem, the first thing brokers have to accept is that the post-trade processes are only one part of a bigger business process, which starts at trade capture and doesn't stop at the boundaries of their own organisation and infrastructure but extends into the client's organisation. Customer orientation in this environment means having an in-depth understanding of the various client process chains and being able to synchronise them with your own. Business process re-engineering projects that concentrate on operational processes alone will not deliver the full potential of all possible efficiency gains. Banks need to take a holistic approach, looking at the front-to-back process chain while including the client processes in their thinking.

Tight process integration with the client not only increases loyalty but is also the only way to get the efficiency both sides want.

The challenge is to keep the integration costs minimal. So the second thing that brokers need to consider is the heterogeneity in their client population. Reducing the service offering to an efficient 'one size fits all' approach would be a simple solution, but this doesn't fit into the market environment described above. In future, brokers will have to increasingly embrace service-differentiation strategies. This means trying to synchronise with the clients' process chain, giving the client a specific mix of process integration and process outsourcing while allowing them to select solutions from the service portfolio that best fit their needs.

This requires that banks modularise their process chain and for each module provide an in-sourcing and out-sourcing possibility. This way it is possible to design an individual integrated process for each client relationship.

UBS has made investments in its IT infrastructure, introducing a meta layer for cross-product client technology. This shields the client from the underlying system and process complexity, and prevents costly changes in legacy infrastructure. The multi-award winning platform provides confirmation management, collateral and margin management, static data administration and cash management modules across asset classes. The plan is to complete the post-trade part of the process chain by introducing netting and settlement modules by the end of 2008. The platform supports multiple integration models by giving the client access through a customisable graphical user interface based on cutting-edge web technology to support process outsourcing strategies. On the other hand, a direct connectivity solution allows process in-sourcing models. To further reduce integration costs, UBS plans to enhance the direct connectivity solution by introducing a configurable template-based model, allowing even faster and more cost-efficient integration.