Why automation is the new kid on the FX block

Spreadsheets may have been your FX go-to when trading in the past but, as Nordea's Patrik Holmberg explains, automation in tandem with digitalisation is changing the way we trade.

Spreadsheets may have been the trick of the trade when trading currency exposure, but, as the digitalisation process takes root, that’s changing. In this exclusive interview, Patrik Holmberg, Nordea’s FX automation & digitalisation specialist, explains why spreadsheets and older legacy systems are giving way to automation as part of a transition that should help make the whole trading process seamless.

Why should you automate your FX processes?

When it comes to FX, developments have been a bit behind the likes of equity trading. However, due to progress in robotics, machine learning and other forms of artificial intelligence, as well as the wider availability of application programming interfaces (APIs), the FX market is ready to embrace change.

A surprisingly large number of corporates still struggle with older legacy systems and are still very dependent on excel spreadsheets for trading their currency exposure. It is a time-consuming process, subject to operational risk and sometimes inadequate risk management. You should therefore not underestimate the power of having a rule-based robot or sophisticated algorithm to translate data and information into actions. After all, robots are less clouded by human bias and not as prone to errors as humans.

Also, by adding rule-based FX trading – the company won’t be exposed to individual speculations, ensuring currency flows will be traded according to any given company’s strategy at all times. It also allows corporates to free up time so that they can focus on their core business or actions for risk reduction, instead of putting too much manual work into daily FX and liquidity management.

As treasurers and CFOs responsibilities increase, it’s hard to find the balance for all daily tasks when FX processes are just one out of many important responsibilities competing for your time. Also, automation is driving much of the decision-making within organisations and the topic is on the lips of many industry leaders and executives these days. It is also more and more common that management even assign individual KPIs on treasury and cash management personnel, encouraging them to embrace new technology and tools for automation and operational efficiency as a drive for change and efficiency.

Can you automate all your FX handlings?

It depends on your organisation and the complexity of your business. Some processes around FX handling still require human participation. Let’s say that you have a large FX exposure towards two different markets and currencies since that’s where much of your cross-border revenue is coming from. Given the importance of these flows, you want to be in full control and know exactly which price you will be trading at and when. You might also have plans to scale the business in these two markets through mergers and acquisitions, which can make it difficult to harmonise processes, data sources and policies across the organisation.

In many companies, it happens every now and then that you do big “one-off” deals with tight margins that you want to hedge in a different way than your ordinary deal flow. In this situation, it is not optimal to shift human decision making to machines since the system integrated to the API, or the data on its own, might not be able to grasp the full complexity of this situation.

I personally think the most successful companies adopt strategies that combine some element of automation and human intellect, states Patrik Holmberg.

I personally think the most successful companies adopt strategies that combine some element of automation and human intellect, and that certainly goes for Nordea’s services and FX offering. Just by automating smaller currency flows that are not being hedged, most companies can save a lot of time since it takes the same amount of time to trade $1 as if you hedge €5 million. There is no holy grail here but as a rule of thumb, automation really makes a difference when it comes to freeing up time and conducting repetitive tasks like currency conversions and simpler yet sophisticated hedging strategies. For more complex hedging techniques requiring options etc., I’d recommend an advisory driven approach.

What are the benefits of FX APIs?

The biggest advantage is that you integrate FX into your software, so that FX becomes a part of your daily business and is taken care of automatically. The APIs can basically automate most parts around FX trading, from normal spot trading to FX forwards and swaps. So, the first benefit is obviously that less resources will spend less time on manual tasks. The APIs also serve as great risk-management tools since operational risk and human errors are eliminated. The FX risk is also managed in real-time by, for example, letting invoices, sales-, order- or payments data trigger an FX trade.

Lastly, it is very easy to get started with the integration by following the documentation and guidelines here. Here, you can register, get access and start working with the APIs in our test environment within a matter of minutes.

Automation - the new trick of FX trading

Patrik Holmberg: "Robots are less clouded by human bias and not as prone to errors as humans." Photo: Nordea Markets

Which FX API should I choose?

The FX Market Order API is designed for customers who want FX conversions at the current market price. That means that the API will do the trade for you directly on the FX market, just as if you would have used a multi-portal or bank trading station. For example, you have some US dollars and you would like to convert these to your home currency e.g. SEK. The API allows you to execute this conversion at a value date of your choice, or even as an FX SWAP. The available FX products are SPOT, Forward and SWAP.

The FX Listed Rates API is designed for customers who might need a pre-defined FX rate that is valid for a longer period of time. An example could be an e-commerce or offline sales solution that wants to show prices and offer payments in local currency before the purchase, without having their end-clients worry about currency fluctuations and hidden fees. Through this API, customer can retrieve fixed tradable FX rates valid for a duration of up to 24 hours at a time for FX SPOT, TODAY and TOM value dates. It also possible to get a “weekend rate”, i.e. a rate that is valid over the weekend although the market is closed.

How do I implement the FX APIs?

In Nordea’s Open Banking developer portal, no additional onboarding is needed, and you can start testing your workflow right away. When you are ready to migrate your solution to production, a Nordea FX Sales onboarding process is required to map correct company IDs, KYC and other data before live trading can begin. Additionally, it is possible to be onboarded on a pre-production system based on live market data from our UAT environment. However this requires a whitelisting of your IP ranges. You can register here.

What does it cost?

The integration and service are free of charge.

What does the future have for automated FX solutions?

The EU Second Payment Service Directive (PSD2) is coming into force in September 2019 and is not only changing the banking landscape, but also how our customers will engage with us in the future. The PSD2 infrastructure is built on open APIs and the directive mandates that any bank must, if a customer requests it, provide competitors as well as third parties with the customer’s digital data that the bank holds. This is not only great for consumers and corporates since they will get access to the most competitive product regardless of which bank they have, but it is also a huge opportunity for us since we will be able to offer our automated solutions to multi-bank and non-Nordea customers in a much simpler way.

The market is more mature on the consumer side when it comes to what we can plug-and-play today, but I hope and believe that there soon will be some prominent gateways providing access to corporate accounts and transaction data from Nordic companies. Then we can really start shaping the banking ecosystem of tomorrow.

For FX APIs we are currently investing a lot of time to develop and further improve the existing APIs but also to build new ones that caters to the ever-changing needs of our customers.

 

New automated solutions will replace spreadsheets

Compared to the digital evolution within, for example, online banking, the development of new FX solutions and tools has been modest. But now the FX market is finally ready to replace spreadsheets and legacy systems with new automated solutions – and it is in the nick of time as corporate companies are seeking to replace old legacy systems and phasing out costly manual processes with new automated solutions.

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