In Part 1 of this two-part series, we discussed some of the challenges around order generation in FX management that confront asset managers undergoing a merger or acquisition. Specifically, we looked at issues that arise when firms seek to combine and rationalize disparate systems capabilities and business workflows. This article focuses on trade execution, as it relates to asset classes, regions, and finally, execution methods and relationships.
In optimizing trade execution, the first question concerns geographic scope. Assuming that the firm is large enough to span multiple geographies and regulatory regimes, does the firm want to regionalize, consolidate or hybridize? This has to be considered within the regulatory framework, naturally. From the alpha generation or cost reduction perspective, regulatory requirements don’t contribute to either. Unfortunately, they’re no less important. Regional challenges and asset class coverage are tightly linked to regulatory considerations. If an asset manager now trades in a part of the world where it did not previously, or begins trading new kinds of FX instruments, the system might now need to support multi-region desks, or discrete asset class desks in specific areas – sometimes both!
Localization is an approach that can improve execution quality with domain knowledge and better timing and execution, but it can increase costs through additional technology, staffing and office space. Consolidation, however, is not without its own challenges. Even in major financial centers, staffing on a 24-hour basis with specialized skillsets and knowledge can be difficult – much more so if asset managers are located outside a traditional finance hub. Not surprisingly, some managers have adopted a hybrid approach, where one desk handles all trades for liquid currencies and others are left to outsourced service providers to handle. This leads to the question of how trades are to be executed.
“A key challenge for asset managers in the process of merging with or acquiring another firm is the rationalization of disparate workflows and approaches to FX management, including optimizing order handling and trade execution. A modern order management system is key.”
Jay Hinton, Charles River Development
If each of the managers pre-merger has been using similar execution methods, the rationalization can be fairly simple. For example, if both use standing instructions, and the majority of their needs are handled in a hands-off manner, it’s mostly a question of SWIFT and custodial notification for the new funds. If, however, both firms have extensive trading methods utilizing different execution, algos, RFQ and a variety of systematic tools, the evaluation process can be more complex.
Similarly, if the acquiree has a more sophisticated approach than the acquirer, things can get tricky, particularly in cases where there are headcount reductions in trading. Who will decide what the optimal method of trading is? How will the determination of overhead cost versus trading cost be made? Often these decisions are given less consideration than they deserve.
Lastly, the question of measuring efficiencies needs to be addressed. In examining the effects of the changes, it’s important to consider using trade-specific methods like execution analysis, as well as economic factors such as cost savings on technology spend, headcount, and the impact to operations. If streamlining a firm’s process reduces the number of workflows but increases the number of trade breaks and problems that need to be addressed by the operations team, it can’t really be considered a net improvement.
To conclude, FX order and execution management workflows require careful analysis from asset management firms undergoing mergers or launching acquisitions. Operational areas requiring detailed transition plans include cash management, hedging, portfolio activity and trades with explicit links between investments and FX, fund and region-specific settings. Regulatory planning includes audit tracking, documenting execution quality, and a rationale for which liquidity sources the firm engages with post-merger.
These are just a few of the necessary ingredients for dealing with the complexity of a modern multi-region, multi-strategy asset manager. A modern OMS should be able to address the “what should be done” and the “how to do it” of each of these. But the “how” is often less important in the long run than the “why.” A firm’s trading technology should support efficiencies across the process and allow asset managers to focus on the part of the process that they believe adds the most value – and partner with their technology vendors and designated liquidity providers to determine the most effective “what” that needs to be achieved.
This article originally appeared on TABBForum. A free subscription is required to access TABBForum.
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