Jury out on impact of trade-finance automation
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Foreign Exchange

Jury out on impact of trade-finance automation

Opinion is divided on how automation of trade-finance processes is changing bank practices in relation to FX reporting and processing.

Banks are using trade-finance digitization as a means of differentiating themselves through the deployment of corporate channels that support automated reporting and integrated processing of FX.

Corporate channels that support both help banks to maintain consistent levels of service to their global customers, whilst also supporting specific customer needs on a local/regional basis.

Corporates are demanding increased multi-banking capabilities across trade and open account – they don't want to be forced to deploy independent channels to communicate with every service provider.

David Hennah, head of trade and supply chain finance at financial services software provider Misys, explains the impact of trade-finance automation in banks’ greater focus on user experience.

“To leverage the benefits of digitization, banks are implementing a variety of organizational changes,” he says. “Typically, trade, cash and FX teams have been merged together under the transaction-banking umbrella. Dedicated roles are now being created to focus on user experience, which is an increasingly competitive area.”

Integrated portal

According to Hennah, having an integrated portal opens up the potential for a one-stop shop covering trade, supply chain, cash, FX and lending, all of which can be cross-sold.

Raj Subramaniam, senior vice-president of global product strategy at Fundtech, which develops transaction-banking solutions, says there are several reasons why trade-finance automation has led to the creation of dedicated roles for FX.

“Firstly, trade finance is typically a very significant business for large corporates, who need advisory as well as transaction services, including buying and selling the foreign exchange required to execute their trade deals,” he says.

“The corporate desk also helps clients enter into forward contracts based on the underlying trade-finance maturity periods to hedge FX risks on a transaction-by-transaction basis due to large trade deal ticket sizes.”


 A search of the current ISO 20022 FX dashboard does not reveal any messages for FX reporting

Enrico Camerinelli

Mirroring the creation of dedicated roles for FX at the bank, a similar structure exists within corporations where corporate treasury is entrusted with responsibilities for managing FX aspects of the corporate international trade business, while the cash management and trade-finance department is responsible for structuring as well as executing trade-finance transactions, adds Subramaniam.

“With increasing automation at both banks and corporates, trade-finance transactions require straight-through processing and hence there is a need for online availability of foreign-exchange negotiated rates at each stage of a trade-finance transaction,” he says.

“This kind of automation requires upfront negotiation of rates, which need to be approved by both parties and available online.”

He continues: “Trade-finance transactions are typically large in value and foreign-exchange rate negotiation involves a degree of manual intervention between both the corporate and the bank. This is done upfront by the corporate desk of the bank, with the treasury of the corporate, prior to the trade transaction being actually processed.”

According to Subramaniam, common messaging standards are supporting automated FX reporting and integrated processing by enabling online availability of related market and negotiated FX rates information, as well as straight-through processing of FX transactions.

“Swift standards enable banks to internally integrate their trade finance and FX systems,” he says. “In addition, corporates are able to easily integrate their proprietary as well as usually multiple bank front-end systems with their ERP [enterprise resource planning] and treasury systems.

“This allows for straight-through flow of FX information as well as transaction initiation and acceptance by corporates across their organization as well as to their banks.”

'No evidence'

However, Aite Group senior analyst Enrico Camerinelli is more circumspect, suggesting he has seen no evidence of common messaging standards supporting automated FX reporting and integrated processing.

“The main reference to answer this question is to check the status of FX reporting messages at ISO 20022, which is the international standard that defines the reference platform for the development of financial message standards,” he says.

“A search of the current ISO 20022 FX dashboard does not reveal any messages for FX reporting.”

Camerinelli adds that wider electronification of FX might be encountering unexpected resistance, as clients still turn to the phone, Instant Bloomberg chat, Bloomberg terminals and/or key banking relationships for price discovery, exploring execution strategies options and carrying out trades.

Joe Halberstadt, head of FX and derivatives markets at Swift, accepts that the lack of common reporting requirements and standards appears to have compromised the effectiveness of trade reporting.

This has manifested itself not only between reporting jurisdictions, but even within single countries where the reporting requirements have been interpreted differently by different repositories, he concludes.

“In areas where reporting standards have been developed and implemented, such as LEI [legal entity identifier, a 20-digit, alphanumeric code that connects to key reference information that enables clear and unique identification of companies participating in global financial markets], the quality of data submitted to repositories is better.”

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