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Mathew Kuppe

Mathew Kuppe

CTO at 360T


We are a bank with no proprietary electronic distribution channel for FX Options
Whats your general impression on whether FX Options are ready to be traded online and which existing channels could we use for distribution?

First of all, yes, FX Options prove ready for online trading
Especially the more vanilla types which are seen increasingly in common use by the buy side and will become more so in the near future
A growing commoditisation and frequency of demand for FX Options, a steep general learning curve in eCommerce undertaken by both buy and sell side over the past few years, as well as a sufficient level of technical sophistication, are a solid basis for taking an instrument like FX Options online
Based on clients positive experiences with trading FX Options electronically via single bank platforms, there is now an increasing demand for taking online FX Option trading into the Multibank arena
Given the high costs and limited life cycle of adding new instruments to your proprietary sales channel, you could consider providing FX Options online and deliver quality service to your clients via a Multibank Portal like 360T where you may already be providing liquidity in other instruments


We are a large corporate treasury interested in understanding the benefits of trading FX Options online
Can you illustrate some of these and allay some of our concerns that e-trading might increase the chance of making mistakes, for example, data entry errors at the dealing stage of our option strategy?

One of the key drivers in e-trading is to reduce operational risk specifically by preventing errors at the dealing stage of OTC transactions as they frequently happen in telephone trading
The growing online trading of highly commoditized products in FX and Money Markets has clearly demonstrated that the error margins in dealing are significantly reduced through single data entry, automation and straight through processing
The introduction of Multibank Portals has added a maximum level of transparency and speed in price discovery and execution across your relationship banks
A great benefit from trading the majority of your standard transactions with all your providers via one single portal is the detailed documentation and audit trail you generate
e-trading will help you to facilitate audit requirements, like FAS 133 and IAS 39, by referencing hedge accounts and seamlessly processing them into your legacy system
It also gives you the possibility to electronically initiate post trade automation such as deal capture and confirmation matching


As a large fund management house we trade the majority of our FX spot and forwards online
We are happy with the high efficiency and transparency and would like to extend this to our frequent FX Option trading
What option types make sense to trade online?

Some single-bank online offerings are providing an extensive range of FX Option types, a few even including relatively complex structures
From a Multibank Portal perspective, we see standard plain vanilla option types most successful in e-trading, since they are relatively easy to define and do not require individual advisory
This applies to plain vanilla European and American puts or calls and Spread options
Risk Reversals and Zero Cost Options are particularly proving to be increasingly popular in the short term
In the medium term, its expected that more complex structures, such as Calendar Spreads, Straddles and Strangles are brought into the picture as acceptance by market participants grows
Generally, the variety of option types available via Portals will continue to grow in line with buy side requirements
This will come along with increasing liquidity and commoditisation of the more sophisticated instruments


Whilst we expect to focus mainly on vanilla structures such as Risk Reversals and Calendar Spreads etc, we might consider using more exotic structures in the future
Are all types of FX Options supported online and if not what types of more complex products might become available? What sort of advanced development do you see coming with regards to online FX Options trading in the future?

More complex structures, like Knock-ins and Knock-outs, could follow as popularity of product and sophistication of all counterparties come to a more mature stage
What we dont see short or mid term are highly complex structures such as Asian styles
Online FX Option trading of the future will bring automated pricing of even more complex option types across all providers


Is the buy side prepared to trade FX Options online and what are the requirements?

The only real requirement for the buy side is a genuine need and understanding for the instrument
Since online trading is generally meant to facilitate trading of standard transactions, it really only applies where both counterparties have a clear agreement on the traded product
All preliminary action, such as general introduction and training in option trading, as well as definition of strategy and instrument selection, need to be subject to the buy sides individual initiative, tools and quality advisory of their relationship banks
Technically, clients treasury or portfolio management systems are often prepared for STP of FX Options


So its rather the question of whether the respective electronic trading channel can provide an interface
In this case it is important for a Multibank Portal to be able to support through a public interface the notification of all products that are executable on the platform
For example, 360T supports the integration to any front-office system in exactly the same way that it successfully manages all online FX trade notification


Is the infrastructure of the sell side ready to provide FX Options to a Multibank Portal?

It seems that not all banks are ready
This is currently still the biggest hurdle in building liquidity over an e-trading channel
Several banks are neither prepared, nor committed, to provide manual pricing using an online FX Option trading solution
Even fewer are prepared to support automated price feeds
We certainly see many developments that are constantly increasing the pressure on banks to price options online, most significantly, the ever increasing demand from the buy side to drive efficiencies and reduce operational risk
Of course it is important that the channels used for online FX Option trading have the necessary technology in place to be able to support the automated pricing feeds from banks


Is your own Multibank Portal ready to provide the underlying technology?

At 360T we already offer online FX Option trading through our TEX Multibank Portal
Our public APIs support the integration of both buy and sell side to automate the trading process in pricing and trade notification
No bank can currently offer us an interface to write to for automated FX Option pricing and execution, but we are working closely with a number of our sell-side customers to realize this integration in the near future


Which buy-side segments are driving the main demand for online FX Options trading?

We see the current demand for online FX Option trading being strongly driven by institutionals, in particular the asset and fund management community
There is currently only limited demand by corporates, but we see their interest growing substantially as corporate risk management measures become ever more sophisticated
In addition, we anticipate increasing interest from market user banks on their own behalf, or for their high net-worth clients


How does the 360T approach to online FX Option trading differ from other Multibank Portals?

While other Portals concentrate on covering