RE-ENGINEERING FOREIGN EXCHANGE
By Phil Weisberg

An October CFO Asia article "Treasurer's Plea," advocated greater corporate involvement in global transaction systems. Here, the CEO of FXall, a currency transaction platform organized by a consortium of banks, presents the case from the point of view of FXall and one of its users. -- The Editor

During the late 1990s treasury operations started to embrace new ways of trading foreign exchange. The first electronic foreign exchange portals emerged with promises of a metamorphosis - costs slashed, prices made transparent, and big overall efficiencies. That was the era of click-and-deal functionality. Now, the landscape for online foreign exchange trading looks radically different. Global companies are no longer interested in dotcom solutions. Instead, they are increasingly looking to reengineer the entire forex process - automating every part of the transaction chain. As a result, many companies are now transacting a majority of their foreign exchange volumes online.

A recent survey from financial consultancy Greenwich Associates showed that large corporations and financial institutions transact an average of US$26.6 billion annually via online foreign exchange trading, and the figure is rising. Among the largest corporations and institutions, the average is US$54.5 billion. These figures show that the internet has matured, and both corporations and portals are looking at ways to fully leverage electronic functionality.

FXall recently embarked on a project that reflects the new and changing nature of online foreign exchange trading. Cisco Systems' rapid global expansion had brought it to a point where treasury operations were under severe pressure, and new ways had to be found to resolve operational challenges. The need for change was particularly acute as subsidiaries at Cisco continued to increase in number and complexity. These subsidiaries dealt with 28 different currencies, involving a hedge program in 12 of the major currencies.

The foreign exchange process at Cisco was at bursting point. Five unconnected systems were operating in different locations, and data could be re-entered as many as a dozen times throughout the transaction process. The problems in the communications process were not helped by the fact that the information-sharing occurred mostly through emails with attached spreadsheets.

The starting point when FXall and Cisco teamed up was a full-scale review of the entire business process - carried out by Cisco. The vision that emerged was that of a completely integrated solution that would make true straight-through processing - including the all-important trade execution component - a reality. In practice, this meant two things. First, banks had to be able to provide Cisco with automated quotes in a controlled and secure environment. Second, there had to be complete integration of Cisco's treasury management system with the systems of the partner banks so that information could be shared, confirmed and settled.

FXall's task was to work with Cisco to re-engineer the foreign exchange process, working with a number of different vendors and bank systems to implement a solution that seamlessly integrated Cisco with its main suppliers and partners. Clearly, this was a project of big dimensions. A completely integrated solution is the only way to reap the real benefits of electronic trading. Systems can't be treated in isolation - what is needed are robust and industry-wide solutions based on open standards. Only through such solutions can very specific and sophisticated requirements be met.

Cisco's treasury operations are now able to automate the entire transaction process - from subsidiary exposure submission to trade execution and from trade confirmation and settlement to accounting. The obvious results are higher efficiencies and lower costs, but there are also a series of ancillary benefits. For example, re-keying of data is no longer needed. This might appear a minor issue, but in practice it means that the risk of manual errors has been removed. Industry costs for such inaccurate bookings are significant - both financially and in terms of the time it takes to identify and then correct these errors.

In addition to the benefits of straight-through processing, full-scale automation ushers in a different level of price transparency. Through FXall, Cisco is now fully integrated with eight banks, making for fast and competitive pricing. The numbers are compelling: at FXall, in 95 percent of instances the first price a customer requests is returned in less than a second. This is another strong industry trend - speed rather than price is the most important issue for corporations. At FXall, customers deal on the fastest price in 50 percent of transactions - and 97 percent of all deals are accepted.

Also, the actual price discovery is an easy process. Even though all of Cisco's trading is centralized, dealable prices are available to authorized Cisco staff in real-time at any location. Cisco traders can determine in which order they want quotes to be listed, and the best bid-offer spreads are highlighted on the screen. Effectively, that gives an independent benchmark to measure relationship banks against. On average, Cisco asks two to three banks for prices when there are competitive trades.

The most telling aspect of Cisco's new foreign exchange process is the operational efficiencies that have resulted from a completely integrated system. What used to take the better part of a day at Cisco is now completed by 9 am. Cisco is not an isolated example - major global corporations are changing the way they trade foreign exchange, fully automating and freeing corporate treasury departments to focus on strategy. Best of all it provides them with a new layer of control and compliance that would otherwise have been difficult, if not prohibitively expensive, to implement. That, in our view, demonstrates the real power of technology.