FX Prime Brokers Rally Around Give-Up Trades

Casting aside competitive differences, three leading foreign-exchange prime brokers—Deutsche Bank, JP Morgan Chase and AIG Trading—have teamed up to create an online service for automating the "give-up" trade process between themselves and their executing brokers. A give up trade is when an executing broker passes trade information to a prime broker for post-trading matching, reconciliation, clearance and settlement.

The purpose of the project "is to help (executing brokers) give up their transactions electronically not just to one prime broker but to all (of their) prime brokers," says Andrew Coyne, director of FX Prime Brokerage at Deutsche Bank.

The new subscription-based service, known as Traiana Harmony, is currently being tested by all three FX-prime brokers and is expected to go live with a group of executing brokers by the third quarter. Traiana Inc., based in San Mateo, Calif., is developing the FX platform and the software and is also handling the integration with the executing brokers. Executing brokers that do low volumes will be provided with Web screens. Traiana will monitor security, maintain, promote and run the service, while hosting will be outsourced most likely to AT&T, according to a Traiana spokesman.

A prime broker performs a variety of services, including clearance and settlement, execution services, securities lending, and leverages its balance sheet and credit rating for customers to borrow against.

"This is not a venture to gain strategic advantage. It addresses a market problem and will allow us to get on with competing openly for client business," says Coyne. "It's open to anyone to participate," even prime brokers that don't use the Traiana Arch system.

All three sell-side FX trading banks, which rank among the top ten foreign-exchange prime-brokers, use the Traiana Arch system to receive trade details from their buy-side clients—hedge funds and commodity-trading advisers. The prime brokers must also match and compare the customer-side trades against the trade reports they get from the executing brokers.

"The problem for the executing brokers is ... they're obliged to give up the trade details to the prime broker. That has always been a manual process," explains Coyne.

Today, the banks (executing brokers) mostly key the trades into the Reuters Dealing 2002 system, a conversational-dealing system. But, then the prime brokers must re-key that data into their back office systems. "It's a manual process to interpret that data and re-key into the system," says Richard Walker, vice president of product marketing at Traiana, who says there's a stack of faxes, phone messages and messaging conversations from the executing brokers.

"All the data points need to be re-keyed, increasing chances for errors which certainly does not help any of the market participants," observes Sang Lee, manager of the securities and capital markets group at Celent Communications.

"It's a lot of responsibility for prime brokers to make all of these connections, he says, noting that a prime broker can deal with anywhere from 45 to 60 executing brokers. Meanwhile, "the executive brokers can be very small, and to do anything leads to a lot of faxing of data and e-mails. "So by making this fully electronic, you're really just asking each firm to link into this one utility," he says.

Since the three foreign-exchange prime-brokers also act as executing brokers and give up a lot of trades to each other, they can immediately benefit from a single hub, notes Walker.

Among the benefits will be end-to-end straight-through processing for buy-side clients, faster booking of trades, lower costs and reduced operational risk because of fewer errors associated with re-keying of data.

Lee says, "These guys realized, 'Why do these trade manually, why not do it electronically.'"

Although there is no one industry standard for communicating trade data in foreign exchange, and all the executing brokers have different methods for sending data in electronic format, "that is where Traiana comes in, says Coyne. The banks are able to produce a formatted file in MQ Series, XML or SWIFT formats, says Coyne. "Traiana can handle those electronic-data formats and make it available to whoever the prime broker is," says Coyne.

This is the first effort in the FX prime brokerage industry to streamline the give-up-trade process, according to Coyne. Between 50 and 70 percent of the prime brokers' foreign-exchange business involves a give-up trade, estimates Coyne.