The increasingly fragmented, complex and costly FX environment continues to challenge the sell side, even as the buy side exponentially increases its electronic trading activity.
To compete, firms must be able to access clean, quality and detailed content from a neutral provider who can aggregate and bridge the gap between indicative and executable data.
A new focus on content in the FX space can help firms mitigate market abuse, correctly measure and manage asset diversity and drive regulatory, compliance and market surveillance initiatives, according to Shai Popat, director of global OTC content at Interactive Data Corp.
Quality data can help firms measure performance and risk while also helping to collect, transform and report across multiple regulatory regimes.
“Even though FX, certainly spot, is exempt from a number of rulings, participants in a market with an estimated notional turnover of over US$5 trillion a day are pre-empting scrutiny and are trying to run it as a closely regulated market anyway,” Popat told Markets Media. “This has been compounded by the various fixing scandals of recent times.”
High trade volumes and a huge number of market participants that are very diverse have resulted in jurisdictional variance in reporting requirements. Consistency in regulation is lacking, but it is clear that consistency is going to give regulators the best chance of overseeing trading practices and market transparency efficiently.
“Key to all of this is high quality and reliable data. Banks are required to be more transparent with how they manage risk,” Popat said. “Having data that’s comprehensive, timely, accurate, auditable and authoritative is critical. The consequences of using poor quality data are costly financial issues from otherwise fully preventable risks."
Banks increasingly struggle with low quality data which often thwarts risk models. The cost of low quality data is also a major issue, as data exceptions, outliers and any type of data that stresses internal validation processes put a huge strain on resources.
“Having a huge amount of data is of little use if it cannot be easily compared or examined. But that is exactly the issue that market participants face,” said Popat. “In general, participants only have a view of the markets in which they are trading, but in an age where risk management is across multiple assets and regions, access to more and more data sources is critical.”
If storage of data wasn’t already an issue, then regulatory requirements to store data for years after the trade has happened has compounded this issue, he added. Banks are looking for data vendors that can provide high quality data, low latency connectivity, data storage solutions and the ability to effectively interrogate data.
While the challenges of applying best execution policies to FX remain, the fallout from manipulations in the FX markets has increased pressure for banks in this space to show that they are servicing their FX clients in the fairest and most transparent way.
“The need for high-quality FX data is integral to best execution, as it is to market surveillance and the elimination of market abuse,” Popat said. “More and more solutions providers are recognizing the pain FX participants face in these areas and are building sophisticated solutions.”
Featured image via Dollar Stock Photo
