One of the most interesting findings from CitiFX’s latest vendor review – published at the end of July – was that many buy-side firms accept that even though their FX vendors could be doing better in key areas, the benefits of jumping ship would be outweighed by the time and effort required to set up with a new provider.
The vast majority (87%) of the corporates, asset managers and hedge fund managers surveyed said they were satisfied with their primary FX vendor. Fewer than one in five were seeking new providers, compared with more than 50% just two years ago.
One of the possible explanations for this decline is that although the number of venues has increased in recent years, they have become so deeply customised and integrated to clients’ internal systems that clients simply cannot face extricating themselves.
Alex Dunegan, chief executive of Lumint Currency Management, agrees that increased integration of execution venues into client systems makes it easier for them to stay with their existing providers and workflows and observes that such a high level of integration is hard to interrupt. This contributes to the perception that switching FX providers is a hassle and potentially cost prohibitive given the demands it places on time and resources.
“The process of changing a workflow involves considerable time, planning and change-management controls,” he says. “Clients are often happier with the status quo than to put themselves through the work of onboarding a new trading venue or a liquidity provider if it is not an immediate need. The change must really be worth the effort.”
X factor
While execution venues reduce manual touch points and mitigate operational risk, they may not be keeping up with client needs – leaving them dependent on an existing technological solution. The survey results show clients are heavily focused on existing providers improving FX-management solutions, especially with workflow automation.
However, Vikas Srivastava, chief revenue officer at Integral, says there are other factors at play and that while the buy side may not be looking for new vendors to the extent they once were, they are demanding increasingly sophisticated service levels and functionality from their banks and brokers.
“Switching to a new FX vendor does not have to be an expensive and time-consuming process if firms take advantage of the flexibility offered by a software-as-a-service technology provider,” he says. “While some investment is required to change vendors, this doesn’t take into account the benefits upgrading FX services can have in the long term.”
The extent to which vendors could be doing better is reflected in the 88% of CitiFX vendor review respondents who admitted to having enhancement requests, of which more than half related to core area improvements.
“Increased automation and workflow integration were identified as the top areas for further client investment over the next 12 months,” says David O’Byrne, head of eFX platforms and distribution at Citi. “With respect to core areas of improvement, 83% cited stability and resiliency as the single most-important criteria when it comes to vendor selection.”
Mature
Dunegan notes that buy-side FX trader clients are always looking for greater transparency in FX execution. “Many were historically unaware of the potential cost savings and efficiencies they could achieve through optimising their FX operations, but that is no longer the case,” he says. “FX execution is relatively mature now from an e-commerce perspective, and so the expectation is that this long sought-after transparency should be available with better real-time reporting.”
When asked which areas of FX services corporates, asset managers and hedge fund managers are most anxious to improve, Srivastava says the focus for the buy side now is on partnering with banks and other sell-side institutions that have already incorporated sophisticated embedded finance capabilities.
“Corporates, asset managers and hedge funds are able to access FX price discovery and execution services delivered by their sell-side counterparts via APIs that are seamlessly embedded into their existing FX execution systems, leading to automated best execution of currency trades,” he concludes. “For the buy side, the necessary focus now is improving their automation capabilities and technology infrastructure to allow for these highly integrated processes, improving efficiencies across their operations.”
