Buy-side Perspectives Issue 3 - Page 16

Exchanging ideas Christian Schoeppe, head of FX trading EMEA at Deutsche Asset Management Asset management houses are changing the way they organise their business as the asset class is transformed by new technologies and regulations. That means an emphasis on best execution, as well as the technologies to go with it as FX evolves into more of an actively traded asset class for our portfolio management. “We face regulatory adverse impacts on liquidity and fragmentation, on the other hand it’s been major central bank policy diversion that contributed to higher volatility since last year,” Schoeppe told the Buy-side Perspectives. “Therefore modernising best execution concepts has been a focus theme in the asset management industry: how can we get the best result from liquidity providers for our investors?” 16 The Buy-side Perspectives | Issue 3 | April 2016 Deutsche Asset Management has reformed its FX trading in recent years. At one time, the firm didn’t have a dedicated FX desk. Then the asset management house began to automate FX positions arising from securities trades. Such Treasury FX trades were collected and executed at 10.00 and at 16.00 daily. As the market becomes increasingly electronic and sophisticated, Deutsche Asset Management has increased the proportion of its FX flows that are traded in an automated manner from zero to between 30-40% - a percentage that is expected to rise as the firm continues to automate in the coming months and years. “This era of market structure changes continuously leads to electronic routes taking major shares of FX trading, meaning systematic data access and handling has become increasingly important for asset managers in the light of MiFID II regulations,” said Schoeppe. “Technology continues to be the most important factor in this electronic migration: leveraging an EMS/OMS suite for the asset class FX to become most efficiently traded is key.” Historically, FX has been traded bilaterally on an OTC basis. A host of new platforms have emerged in recent years where FX can be traded in a more electronic exchange-style execution environment. Examples include FXall and LMAX. At the same time, other tools such as BlackRock’s Aladdin order management system have emerged, which combine risk analytics with portfolio management, trading and settlement tools on a single hosted platform. “One key aspect involves active counterparty management and enhanced communication: our traders need to continuously assess and monitor what areas of the business liquidity providers are committed to, which impacts how and where our business is executed,” said Schoeppe. For Deutsche Asset Management, tools such as Aladdin are useful because they remove the problem of reliance on numerous different IT interfaces. They are also better suited to non-equity asset classes than some of the older technology platforms, which in some cases were originally designed for equities only then simply ported across to FX and other asset classes, with the result that their abilities were not always ideally designed for OTC products. While undeniably important, technology is not everything in FX, however. A more holistic perspective is one of the key areas that Schoeppe likes to emphasise when it comes to achieving best execution in FX.