By Alex Knight, Head of EMEA and Global Sales, Baton Systems
The Business Times in Singapore recently reported that most large South Korean banks are planning to set up night shifts for staff, now that won trading hours have recently been extended. This certainly alarmed me as someone who witnessed the slog of the night shift trading desks of the 1990’s first hand – though was fortunate enough to avoid them at the time! It feels like the FX market is devolving rather than evolving with the times – bringing back a working condition long since abandoned.
There is certainly a clear case for the lengthening of won trading hours as part of FX market reform, as it will allow Korea to improve access by international investors and boost the probability of its equities being included in developed market indexes.
However, is the answer really to just bring back the dreaded night shift?
This is perhaps indicative of a wider trend within FX markets in particular, to throw bodies at issues and rely on conservative “tried-and-tested” tactics that aren’t ideal, but get the job done. We are similarly seeing firms throw bodies at the issue of T+1, with the FT reporting back in September that European managers are relocating staff to meet the impending shift in market structure.
Some banks are definitely analysing their middle & back-offices along with IT and other departments to prepare for any risks that may emerge as the FX market reforms, something signalled in the same article by Industrial Bank for one, and something that we are hearing at an increasing rate from our banking contacts. Beyond just preparing for risks though, firms should be looking at how their middle and back-offices can be enhanced for broader benefits. In 2024, with the developments that have been experienced across most developed financial markets, firms should be looking to take a more forward-thinking, creative approach to problem solving in FX markets, and stop relying on antiquated measures such as night shifts and staff relocations.
Take DLT as a prime example of a technology that is crying out to be used to a greater degree by banks. It has actionable use cases, such as for safe and instant bilateral FX settlement for currencies both within and outside of the CLS sphere, but there still exists several trillion dollars of FX transactions that have settlement risk attached to them each year. This is because of the same pervasive mindset of conservatism, cost saving, and reluctance to overhaul what is a financial market with extremely outdated manual operational processes attached to it.
Another example would be in the day-to-day liquidity management that banking treasury teams have to carry out, ensuring that they are adequately funded so that the bank can meet its obligations, while simultaneously not having overly large buffers of unused assets. Many of the current processes for handling this kind of task are manual and reliant on outdated, legacy technology, when DLT-based workflow solutions exist and provide a far more transparent, efficient means of carrying out a key, daily task.
These are just two examples to demonstrate the capabilities that are available in FX markets now if firms embrace a forward-thinking approach, which is why I get so troubled when I see strategic business decisions being taken in FX markets that take us back to the 1990s. It is reflective of a pervasive attitude of conservatism, particularly in this asset class, which stifles progress and entrenches inefficiencies.
Now is not the time to go backwards, especially not with the technology that is now available to financial institutions given the boom of talent moving to technology vendors to help develop solutions. Instead, institutions should look to tackle the FX markets reform with a proactive and creative approach, rather than by forcing staff to spend their nights at the FX desk.
