Treasurers are gradually warming up to the idea of online FX. Once limited to a dial-up system in the early 1990s, FX transactions quickly moved to the Internet, thanks to the development of and improvements in global communications. Today, the Internet’s proven to be a fast, convenient and secure medium for FX transactions.

Although online FX volumes have grown steadily, experiencing their biggest increases over the last two years, many treasurers are still reticent to jump on the online FX bandwagon. According to a GTNews survey conducted in 2002, treasurers stated that they were unwilling to buy into eFX unless they were convinced of its straight through processing (STP) benefits.

Automation Is Key

The automation or STP of FX transactions eliminates a number of manual steps, including the keying of tickets that brings the possibility of transposition errors. What’s more, the processing of an online transaction can now be completed in seconds instead of minutes. That means treasurers will be able to spend fewer hours on administration and more time on critical issues, such as risk analysis and risk management.

Automating some or all of the trade process also provides a better audit trail, greater structure especially in setting individual trading limits, reduced trading costs, and more control for the treasurer and corporation.

Finding the Right STP Solution

When looking for the STP system that will work best for their company, treasurers need to consider several key points:

  1. What system offers the best end-to-end processing of transactions with the least chance of human error?
  2. How important are real-time data and updates? Does the STP have to be real-time? Does the transaction need to be in the Treasury Management System (TMS) seconds after the trade or is a 10 to 15 minute delay okay?
  3. How secure is the system, and can the data integrity be trusted?
  4. Does the TMS have an interface? If so, what type? What message formats does the interface support?

Automating the End-to-End Trading Chain

The ability to automate FX transactions from quote to settlement may give treasurers a compelling reason to move to online FX. This would involve allowing front-office staff to link into trading portals from their internal work processes and systems. Deal tickets, confirmations and settlements, accounting entries, and hedge tracking systems should all be automated to provide the convenience, speed and productivity treasurers are seeking.

Many participants in the E-trading industry have been working to develop and deliver standardized interfaces and messaging formats to facilitate integration between the buy and sell sides — and to simplify automation of information and processes within the corporate front and back offices. For these initiatives to be successful, however, the corporation needs to have up-to-date treasury automation in place.

The Value of Real-Time Data and Updates

Some corporations only need hourly or daily updates of their back and front office positions. However, a number of large corporate treasuries have invested in an integrated treasury system to ensure that their front and back office positions are always the same, and that positions are maintained in real-time so that treasurers have the most accurate and up-to-date record of their positions as possible.

If an STP system doesn’t offer true real-time capability, the position records in the treasury system could very well be inaccurate and unreliable. In addition, if the data update needs to be manually input immediately after the deal is executed, there is a greater risk of both human error and an inaccurate position record.

The Importance of Security

Commitment to Internet security has to be considered a top priority from management on down for treasurers to feel comfortable about online FX. A corporation’s security will not only depend on internal controls and awareness, but will involve its partners, banks and other third parties.

The first step to ensuring security is to establish and write down specific security policies — and clearly communicate them to all staff, partners and third parties. Even with established policies, companies need to be aware of internal and external risks that exist, such as employee fraud, misunderstandings or disagreements with formal procedures, and hackers.

To prevent a single person from committing fraud, corporations should split duties and critical decisions between two or more people. A good Internet security program also uses procedures that protect physical systems, including:

Authentication

An identification used to prove that the people online are who they say they are. This could be a user name, password or mother’s maiden name; a digital certificate, hardware token or private network; or an iris or retinal scan, fingerprint, or hand geometry. The best authentication procedures use at least two identification mechanisms.

Authorization

Verifies that the person has permission to perform a trade or other specific action on behalf of the company. Authorization is enforced by data stored in the corporation’s databases and can be granted by using the private key of a digital certificate.

Integrity

Ensures that information is not changed or tampered with by any non-authorized users. Integrity can be assured by storing independent copies of the trading transaction data, such as the buyer’s treasury system, the seller’s trading system and the independent marketplace database.

Privacy

Protects sensitive data from theft or misuse. In the Internet world, cryptography is the mechanism that safeguards data privacy. For corporations with partners or third-party providers, they must have contracts that clearly describe privacy policies and how the corporation’s information is handled.

For online FX to become a regular, viable activity for corporations and their treasury, users and providers must have physical, electronic and procedural safeguards in place — and provide training to ensure everyone involved knows the importance of observing these security measures.

Choosing a Provider

Most treasurers choose a single-bank trading platform because multi-bank platforms are only available to corporations that have trading relationships with many banks — plus these services can be very expensive. According to Jane Guyett, Managing Director, Global Foreign Exchange at Bank of America, “The single-bank platform usually offers a wider range of functions, real-time price quotes, and more products than multi-bank platforms. In addition, if treasurers have a strong relationship with one bank, they can leverage the single-bank platform to enjoy a higher level of service.”

How Letter-Perfect is Online FX Today?

Both STP and online FX are getting better all the time. Yet, there are still some challenges to be worked out. Most STP solutions have not been integrated into treasury applications from beginning data entry through settlement. Many still require the use of two applications: the treasury system to establish FX positions, and the FX trading platform to execute trades. Plus, there is still some inherent risk to data integrity.

“The good news is that more and more corporations are becoming aware of the value of automating treasury management systems,” says Guyett. “At the same time, they are centralizing both FX risk management and transactions to achieve greater control and efficiency. So as treasury automation extends globally, it will be easier for the treasurer to manage FX transactions and risk for all operations.”

As more countries become familiar with the ease and efficiency of online FX, banks with an established presence in these markets will be able to promote international trading in their currencies. This could eventually provide better information on pricing and cultivate the growth of eFX in emerging market currencies.

The Future of Online FX

Once STP becomes better integrated between corporate TMS and online FX platforms, a greater percentage of trading will move online and away from the telephone. The ability to transfer trade information directly into a TMS without any manual ticket writing or human intervention will greatly reduce errors – and ultimately cut expenses for monitoring trade flows and correcting erroneous trade details.

Someday soon, online FX will be a continuous process that allows treasurers to always be logged into their treasury system. Without ever needing to log into any other system or application, treasurers will be able to view positions, generate trade requests, execute, confirm and settle trades automatically, and even authorize payment transmissions — all with the click of a button. And considering how far online FX has progressed and continues to do so, that day won’t be far away.

This article appeared in September 2003. (BA)
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John Manzella
About The Author John Manzella [Full Bio]
John Manzella is a world-recognized author and speaker on global business, competitive strategies and the latest economic trends. He also is CEO of World Trade Center BN, chair of the Upstate New York District Export Council, and founder of The Manzella Report and Manzella Trade Communications Inc. His latest book is Global America: Understanding Global and Economic Trends and How To Ensure Competitiveness.




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