In a post-Rusnak era, operational risk management is a high priority. Could the Financial Information eXchange messaging standard provide a safety net? Foreign exchange dealers are understandably nervous about discussing operational risk controls, given the withering press coverage of John Rusnak’s record $700 million forex fraud at Allfirst Financial, uncovered last year. But European and US central banks and regulators, realising the potential threat of lax operational risk management, are set to devote much of 2003 to exploring the issue, developing best-practice standards for a variety of front- and back-office operational processes. In the meantime, one industry initiative, the Fi nancial Information eXchange (FiX), looks set to bring operational risk benefits to a forex market looking to battle potential fraud and mis-keying. FiX for forex allows for the electronic communication of pre-trade and trade messages between financial institutions, primarily investment managers, broker-dealers, electronic communication networks and stock exchanges. Bank officials say it is growing in popularity, primarily due to its ease of use and operational risk benefits. FiX supports the automation of trading from price discovery through order capture to transmission of post-trade instructions. Its backers say it will provide cheaper access to liquidity. Whether to prevent fraud or mis-keying, banks need to have adequate systems to minimise their forex operational risk. Paul Fisher, head of the foreign exchange division at the Bank of England, drew out the importance of operational risk for the market in a speech at the FX Week (Risk’s sister publication) inaugural congress at the end of last year. “One particular operational risk – the sort of dirty washing not often aired in public – is mistaken settlement instructions. I would like to think that increased automation will reduce the number of such errors, but it is crucial that front offices sharpen up their act too,” Fisher said.Perhaps as a result of such pronouncements by leading central bankers and other regulators, forex desks are turning to FiX. DCE Consultants, a Dutch firm that conducted a FiX survey late last year, found that 14% of buy-side member firms and 9% of sell-side participants are already using the FiX messaging standard for forex transactions. DCE predicts that within the next 12 months 17% of sell-side firms signed up to FiX will use it for their forex business, whereas there will be a slight drop to 14% of buy-side institutions using FiX for forex. This buy-side drop can be explained by the fact that FiX is set to double its number of members within the next year, with most institutions choosing to concentrate on implementing the protocol for equity and fixed-income markets, says Steve Dawes, a consultant at DCE’s Oxford office. But the projected rise in sell-side FiX forex usage could well be attributed to banks’ desire to be seen to be taking operational risk seriously, according to some. “We adopted FiX for foreign exchange in March 2002, after using the protocol in Barclays’ exchange-traded equity business, and it’s been a great success,” says Zeeshan Khan, head of online trading technology at Barclays Capital in London. “Real money managers and hedge funds often already have FiX capabilities, so it’s a relatively simple and time-efficient process to start matching trades through the protocol. FiX helps reduce operational risk by lessening the potential for double keying of trades or losing a trade. Furthermore, through FiX, trades are well logged.”FiX has traditionally been used for the equity markets, and Barclays is typical of many banks in that it chose to use the protocol after successfully using it for its equity business. But although Khan recognises the operational risk benefits of using the messaging standard, he is also aware that the uptake of the protocol for forex has been surprisingly slow, given the benefits it can provide. “It makes business sense to bring the protocol on board when one realises the vast number of commodity trading advisers and real-money managers who already use FiX for their equity dealings,” Khan adds. Additionally, FiX relieves some technological burdens for both the sell and buy side. “Previously, we had our own bespoke XML-based API [application programming interface], but clients, who often do business through a number of banks, had to contend with implementing a number of APIs,” Khan says.Despite the relatively promising usage figures, and Khan’s endorsements, other bankers are not yet convinced of the need for FiX in the foreign exchange arena. “We have looked at FiX for forex and dabbled in it for a few of our clients, but apart from the exchange business we have seen a very limited requirement to use FiX for our clients,” says Aaron Grantham, director of customer services technology at Deutsche Bank in London. “FiX is far less pervasive in the FX B2B market compared with equities or fixed income.” Other bankers point out that foreign exchange spot and forwards contain small strands of information, whereas FiX is more useful for asset classes which rely on conveying a huge string of fields. FiX, they argue, could therefore be a sensible way to transmit forex orders.Risk...
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