Steps Ahead

The FX swaps market is growing – are you positioned for data-driven success?

As The Full FX reported in its recent article: “FX swaps is big business.” Driven in part by the disappearance of zero interest rates, FX swaps trading activity has grown by more than 28% over the last five years across the UK, US, Singapore, Hong Kong, Japan, Australia and Canada. In particular, Singapore (103.5%), Canada (98.1%) and Hong Kong (59.9%) experienced massive increases in trading. But while the market has grown, it has been significantly slower to modernise than other asset classes – and this creates a unique challenge when it comes to harnessing the power of underlying transaction data.

Fragmentation and complexity

While electronic trading platforms have gained popularity and market share over the years, voice trading continues to play a substantial role in FX swaps trading, especially for complex or large transactions where price negotiation and customisation are essential. The continued prevalence of voice trading in the FX swaps market underscores the importance of human interaction and relationships in the trading process, particularly for institutional clients who value personalised service, access to liquidity, and the ability to negotiate terms directly with counterparties. However, electronic trading platforms have been steadily gaining traction, driven by factors such as increased transparency, efficiency, and regulatory requirements. These venues are, however, largely limited to interdealer trading between banks and HFT traders that have prime brokers within the liquidity pool.

This fragmentation of trading across voice and multiple electronic venues creates a unique and complex data challenge for FX swaps traders. Insight into transaction data is particularly critical to success in this market, enabling traders to analyse the performance of swaps throughout the lifecycle, manage risks accordingly, and make appropriate trading recommendations to clients at the right time.

Hedges, based on FX Swaps, need rolling at some point. Two key essential requirements for this, especially around month-end, are:

  • Getting alerted at the right time for upcoming rollovers (so that the desk can make a decision on whether to roll early)
  • Finding the right counterparty to trade

As an example, spreads on EUR/USD 3m forward rose from 0.33 pips on March 8th 2023 to 1.49 pips on March 21st 2023. This was attributed largely to the collapse of SVB and the announcement of the UBS and Credit Suisse merger. Having a reactive system which prompts for “early” action is absolutely vital around these periods of increased market stress.

Fig 1: Alerts of up-coming rollovers

Fig 2: Market Regime based alerts

In a recent case study with a global FX trading bank, however, Mosaic discovered its data was fragmented across 8-10 different sources, with almost no consistency in the format and structure of data sets. This created a unique set of challenges:

  • Isolated and fragmented FX data sources – non-standardised data across the organisation
  • RFQ response rate – missed business due to inconsistent quoting
  • Speed of reporting – client reports slow to generate and often out of date
  • Inability to analyse FX data effectively – no tools to extract productivity-enhancing insight
  • No global view – teams all maintained their own data and did not share across the organisation

Laying the foundations for success

As in other FICC markets, automated, AI-driven data analytics tools have the potential to revolutionise a bank’s FX swaps business – but before these can be put in place, this underlying challenge of fragmented and unstandardised data must be resolved.

By combining this particular bank’s disparate data sources into one comprehensive view, Mosaic was able to deploy its interactive dashboard with a fully customised overview of client activity, created by users. This gave the bank actionable intelligence at their fingertips. Mosaic led the company through four key stages in its analytics journey:

  • Normalise: aggregating and normalising data sources to maximise value
  • Analyse: turning unstructured big data into smart data
  • Optimise: providing unique and personalised insights
  • Capitalise: navigating users to opportunity and action

Each of the bank’s FX swaps traders and salespeople now has world-class market intelligence at the click of a button, enabling them to operate with a 360-degree view of market activity in order to zero in on specific opportunities and take advantage immediately. In addition, because Mosaic is truly multi-asset solution across FICC markets, the bank can easily extend the benefits to other asset classes and derivatives.

Mosaic has given the bank access to FX swaps insights such as:

  • Identifying market and client inquiry anomalies
  • Delivering reports such as FX swaps rollover through natural language generation
  • Understanding clients’ seasonal trading patterns, including the time of day they are likely to inquire
  • Identifying positions the client is likely to roll, providing an opportunity to capture more FX swaps business
  • A single view of historic FX swaps voice and electronic client activity, across sales teams and locations, which can be fully customised by each salesperson
  • Ability to track key execution KPIs, such as Hit Rate and No Quotes %, and generate reports on demand

The evidence is clear: access to comprehensive data sets and sophisticated data analytics tools is essential for success in the FX swaps market. As the market continues to grow, banks that fail to make analytics central to their core strategy and operations will risk being overtaken by the competition. The time to become data-centric and harness the power of AI is now.