January 2, 2014

The Right Tool For The FX Job

As FX trading takes off inside buyside firms, OMS vendors are addressing the specialized needs of trading foreign exchange.

By By Mary Schroeder

Mary Schroeder

As buyside firms look to consolidate asset classes on a single trading platform, they have been turning to multi-asset class order management systems to support foreign-exchange trades along with other types of securities. Firms began placing more emphasis on FX trading as equities waned during the credit crisis of 2008, and OMS vendors began converging their systems with execution management systems to save on infrastructure costs. It helps with risk, too. A consolidated OMS allows a firm to look across the entire organization to see its FX exposure, whether it's connected to equity or fixed-income trades.

As FX traders become more discerning and sophisticated, they're looking for greater FX capabilities. Along with a desire for aggregated functionality, they also want trading capabilities in their OMS. Most recently, Charles River introduced electronic quotes and execution for FX in partnership with its 360 Treasury Systems (360T) solution.

For larger money managers, the major OMS providers are Bloomberg AIM, BlackRock's Aladdin and Charles River; some include Linedata, a Paris-based provider, on the list.

THE OMS ROLE IN COMPLIANCE

OMSs are an important piece of trading software, responsible for generating FX orders and running compliance. For instance, a buyside firm may generate a number of global equity orders for Canadian, Asian and Australian securities. Those trades generate FX exposure, which firms need to hedge out. An OMS will automatically tell the trader to purchase a certain amount of Canadian, Hong Kong and Australian dollars as a result of those trades.

An FX OMS also provides pre-order compliance. A fund may trade on behalf of many different accounts, all with different rules and restrictions. For instance, Account A might not be allowed to trade with certain brokers, so the OMS will tell the trader they can't trade with those firms. Or the OMS may say Account B can only trade with a certain broker.

The majority of clients for an OMS provider like Linedata is running equity or fixed-income funds and using FX to ensure the firm has the right currency to settle transactions, said Matt Gibbs, product manager for Linedata. Traders also use FX for hedging: They look at their currency exposure across the portfolio and use forward FX's or NDFs (non-deliverable forwards, a standard type of security within FX) to hedge against currency fluctuations.

Until recently, firms would hedge on a quarterly or monthly basis, according to Gibbs. "That would be the time they roll and adjust their forward transactions to zero out their currency risk. What we've seen now, especially with the Asian currencies, which are even more volatile, and everyone assumes they are very overpriced-people are going through that currency hedging process on a daily basis because they're so worried about that exposure to the currency," Gibbs said.

To better support FX traders, Linedata has added currency derivatives and implemented a new way of calculating market value and currency exposure and is in the process of automating the ability to manage hedging for 1,000 funds, all with different currency risk tolerances, with the press of a button, Gibbs said.

ADDING EXECUTION

In addition to enhancing coverage and functionality, OMSs are adding and improving execution capabilities. Charles River, for instance, recently improved trading functionality available through its OEMS, or order and execution management system.