A persistently weak Australian dollar coupled with suppressed commodity prices over the past 12 months has kept cross-border trading activity high, with currency risk management remaining a major focus for many companies and investors in Australia. High levels of liquidity have kept volatility low, driving demand among yield-hungry investors for more efficient execution of trades and better pricing.
ANZ is named Australia House of the Year for its efforts to strengthen its foreign exchange platform, making it more transparent and working hard to internalise risk rather than offloading it to the market.
A key development this year was the launch by ANZ, in May, of an electronic forex algorithmic engine called Prophet. This in-house platform replaces a series of solutions that had been provided by an external technology vendor. ANZ estimates the cost savings resulting from introduction of this system will be $1.2 million annually.
“We can see the pattern of execution changing and Prophet is part of this,” says Shayne Collins, head of global markets. “These kinds of client requirements are around transparency, being able to demonstrate your ability to execute well and internalise risk.”
Collins says Prophet will allow the Australian bank to move from a matching engine, which simply lines up competing bids and offers before executing them, to a risk management engine, which offers robust liquidity management and more efficient pricing. This helps optimise yield for clients and will drive more forex trade flows through the platform, says Collins.
“Managing your access to liquidity is not about just going to the street and hitting the best bid or offer price there. If these guys have got further trades to execute, they don’t want to find the market is moving against them,” says Collins. “So clients want a forex provider that can capture franchise flow and understand correlations to more optimally hedge risk in a way that doesn’t materially impact the underlying that is being executed.”
Beyond Prophet, ANZ also continues to invest heavily in its Sky credit risk management platform, first rolled out in 2014, which integrates derivatives structuring, pricing and risk management functionality into the trading desk. It is being used to calculate ANZ’s credit valuation adjustment and funding valuation adjustment for proposed trades directly within the pricing system.
Collins says development in these systems is ongoing and there will be new releases of the risk engines, including more functionality, going forwards.
“There are pros and cons with either having a vendor-provided solution versus doing an in-house build,” says Collins. “In terms of our forex liquidity engine or our pricing, valuation and risk engine, we believed on balance that it supported doing our own in-house build and thus being able to deliver a more agile development environment.”
It is ANZ’s focus on transparency that has led the Australian bank to embrace the European Union’s Markets in Financial Instruments Directive in a way that – being a Melbourne-headquartered bank – it wouldn’t ordinarily have to.
Under Mifid II, firms trading extensively in a particular asset on a bilateral basis – called systematic internalisers, or SIs – are required to provide full pre- and post-trade transparency on any trades under a certain size, which depends on the instrument. SIs are also restricted from matching off-client trades on a riskless basis, and such trading activity is meant to be pushed on to multilateral venues.
Banks still face uncertainty about whether they will qualify as an SI for certain product sets. While ANZ trades a sufficient volume of Australian and New Zealand dollar rates products in Europe for them to fall under scope, this will ultimately depend on whether its clients shift most of these products on to a trading venue, in which case ANZ might no longer qualify as an SI for them.
However, Collins says the bank is also keen to opt in as a SI for those products where it would normally lie outside of scope.
“For products where we wouldn’t necessarily qualify as an SI, we would likely opt in, or at least try to replicate this kind of service proposition outside of Europe, because we feel that is where markets are heading and that is what clients require from us,” says Collins. “These kinds of requirements around transparency and being able to demonstrate your ability to execute well – ultimately in the absence of regulation they will become more the norm in terms of our broader model.”
Beyond forex, ANZ remains a strong player in other asset classes, such as rates, credit and commodities. The Australian bank also continues to strengthen its hand outside of its home markets, with a strong presence in Europe, the US and the Asia-Pacific region.
Following the departure in 2015 of chief executive officer Mike Smith, who was particularly bullish in Asia, the bank took a moment to rethink its global strategy. It pulled back from some parts of Asia, but didn’t leave altogether, instead refocusing instead on those areas where it was particularly strong. It let go of some of its core retail operations – selling its wealth management business to DBS in October 2016, for example – but continued to invest in its Asian operations that serve institutional clients.
“Notwithstanding ANZ’s recent sale of retail and wealth assets through Asia, what hasn’t changed is the bank’s commitment to being a strong institutional bank across corporate and financial institutions in the region,” says Collins. “We continue to grow our institutional business in the region in a disciplined way, focusing on our core products, being relevant to our clients and helping them to facilitate their capital and trade flows throughout the region.”