Trading foreign exchange via the Internet has matured in just a few years from a technological novelty to a standard way of doing business. While companies initially started trading electronically because it promised faster, easier price discovery and tighter pricing, some now are deriving even more benefits by using it as a gateway to straight-through processing.
Straight-through processing means being able to do a trade and then convey the data about the trade back into the company’s accounting system without re-keying any information. That doesn’t sound like an earth-shattering development, but it can save companies a lot of time. One company, General Electric Co., has taken the concept even further by building hedge documentation into its system.
Geri Westphal, assistant treasurer of Oracle Corp., says achieving STP has saved Oracle’s treasury staff three to four days a month. Oracle, which does 80 to 100 foreign exchange trades a month, used to manually consolidate the data about subsidiaries’ foreign exchange exposures, prepare foreign exchange trade tickets and then enter the information about completed trades into another spreadsheet. Now, the financials module of Oracle 11i pulls the trade information from the system’s payables, receivables and investment data, and the trades are consolidated in the trade blotter of FXall, a foreign exchange trading platform.
A survey of 375 U.S. companies by U.K. technology consulting firm ClientKnowledge found that 42% trade FX electronically. FXall, which lets clients trade foreign exchange electronically with 46 banks, estimates that about a third of its 600 customers have some form of straight-through processing. Another online platform, Currenex, also says about a third of its corporate clients have straight-through processing.
Of course, there’s a lot of work involved for companies that are among the first adopters of straight-through processing. General Electric Co. started work on its Trade Request System (TRS) in 1997 and only achieved straight-through processing in 2002. Maggie Scarborough, a senior analyst at Financial Insights, a technology research firm based in Framingham, Mass., says companies that don’t do a lot of foreign exchange trading might not see the sense in investing a lot of time and money to get to STP. But “as the large institutions deploy infrastructure that enables straight-through processing with, say for example, treasury platforms, it will make that type of capability cheaper and more consumable by companies that don’t have large volumes to trade,” she say.
David Rusate, GE’s deputy treasurer, points out that there is more at stake than just saving staff time and making operations more efficient. STP also avoids costly errors. “I don’t care who you are, when you re-keypunch, there’s a greater chance of error,” he notes. At GE, thanks to STP, “those [errors] have been eliminated.”
GE does about 20,000 foreign exchange trades a year with a total value of about $80 billion. It’s now on its eighth version of TRS. While earlier versions gave GE “pieces” of STP, the final step came in 2002, when TRS got to the point where it could upload trades into FXpress, GE’s data warehouse, which in turn uploads them into FXall.
In addition to being linked with FXpress, TRS is integrated with GE’s internal billing system and some of its general ledgers. Its flat-file functionality lets it take files that contain many smaller trades, say from the accounts payable system, and feed them to a single financial institution, chosen by RFP, that does all the transactions based on benchmark pricing.
Two birds with one system
When GE built its web-based system for routing foreign exchange trades, it used that as an opportunity to take care of another chore, the accounting documentation for foreign exchange derivative trades. The FAS 133 Wizard forces business units to provide the information necessary to comply with FAS 133, the U.S. accounting regulations for derivatives transactions, before a trade is executed. Rusate says 80% to 90% of GE’s foreign exchange trades require such documentation. “Based on the input the business user originally gave us–whether they’re buying or selling–the documentation wizard has logic and can ask a series of questions that then trigger the documentation,” he says. The documentation component also provides another guard against errors because its logic will raise a red flag if a derivative transaction seems inappropriate. And since the system doesn’t send the trade to be executed until the documentation is complete, the FAS 133 Wizard serves as a control against undocumented trades.
Freeing up staff
Rusate credits TRS with cutting the time that GE takes to do forex transactions by 90%. TRS also allowed GE to grow without increasing its treasury staffing, he says. “We’ve been able to process a larger number of transactions with the same headcount.” Treasury employees can use the time saved to advise GE’s business units on how best to hedge currency exposures. Rusate won’t comment on the cost of developing TRS because GE is currently in discussions to license the system to a financial institution that in turn would make it available to other companies.
Oracle Corp. attacked straight-through processing as part of a three-year effort to centralize and automate the business. The treasury group achieved STP with a standard Oracle product, Oracle 11i, after working with Oracle developers to make sure the financials module of Oracle 11i had the functionality they needed in the form of an open interface that uploads foreign exchange trades into FXall. Westphal says treasury spent about six months “scoping out what we wanted STP to look like,” and about three months testing the system.
At this point, Westphal says, companies aren’t thinking about whether they should have STP, but when they can achieve it. “Everyone I talk to is working on STP in one way, shape or form,” she says. “Any time you can eliminate the touch points and eliminate the human intervention, all the better.”