Gauging the upside of straight-through processing in FX
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Ali Curi: Markets ConversatION is an ION podcast where we discuss topics of importance to capital market participants with product owners, subject matter experts, and industry leaders. 

Anne Marrero: By automation, you're getting rid of manual processes. So that means lower operating costs. Fewer manual processes mean fewer human errors that are being introduced into the process. Fewer errors, fewer exceptions, better service to your customers, overall good for the business. 

Ali Curi: Hi everyone and welcome to Markets ConversatION. I'm Ali Curi. On today's episode, we explore the adoption of straight through processing in foreign exchange transactions. Straight through processing, or STP, automates the end-to-end process of FX trades, eliminating manual interventions and enabling near real-time execution and settlement.

The adoption of STP in FX transactions, offers significant advantages in terms of efficiency, accuracy, and cost savings. Ann Marrero from ION Markets FX will help us understand recent advancements that promise to standardize and streamline global payment systems and how gauging the upside potential of STP in FX becomes increasingly important for market participants to remain competitive.

Let's get started. 

And Marrero, welcome to the podcast. 

Anne Marrero: Hi, Ali. It's great to be here. 

Ali Curi: Well, thank you for being here. Anne, before we get to our conversation, let's learn a little bit more about you. Tell us about your background and what is your current role and responsibilities at ION? 

Anne Marrero: Throughout my career in financial technology, I have had a lot of experience with different financial products, different asset classes, and I've had the opportunity to be in different roles and have different perspectives of the industry. Right now, I'm in a product management role at ION, primarily focused on the post trade technology for the FX asset class. In that role, we work with a real diverse group of institutions, including large banks, medium banks, small banks.

We also work with brokerages and international payment providers. We even work with startup companies. It's a really diverse group of market participants in the FX space that we work with and have experience with. 

Ali Curi: Anne, let's start with some background on straight through processing or STP in foreign exchange. Why is it important? And what are the main driving forces behind the increasing adoption of STP in the FX market? 

Anne Marrero: I think traditionally, that's always been a goal of a lot of institutions to have that straight through processing for a variety of reasons. Obviously, more automation reduces operational costs, fewer staff. Also, with more automation you have fewer errors, you don't have manual process that introduce human error. Those errors can be expensive, not only in time, but they also can impact your customer service levels, so retention of customers. So you want to avoid that. And I think generally too, as time goes by, customer expectations keep increasing as far as transactions should be simple and transactions should be really fast. So there's those motivations. 

Now more recently, in the cross-border payments and settlement space, there are now capabilities that allow for real-time and faster payments. And now there's regulations also that are coming into play. So, there's a lot of motivations to achieve these STP rates. Those are some of them. 

Ali Curi: You mentioned regulation. Can you explain to us, how does the regulatory push for real-time payments, such as the SEPA Instant Initiative, contribute to the need for STP and FX transactions? 

Anne Marrero: So SEPA is a really good example in that space around real time payments, especially on the, cross border payments, where there can be an FX component. So there's new regulation that's being adopted in the EU zone that impacts SEPA transfers. For those not familiar with the actual SEPA term, it stands for a Single Euro Payments Area. So SEPA is used for Euro denominated transfers within the EU zone. It's been around for some time, but the core focus of the new regulation is to make real-time or instant payment services a mandatory service that payment service providers have to provide to their clients. And specifically, this new regulation will require that the transfers be completed within 10 seconds. Additionally, the service needs to be available 24/7. 

While, real-time payments are not necessarily new, there's a lot of domestic payment systems that have them. For example, Faster Payments in the U. K. For cross-border systems, like SEPA and SWIFT, they are now enabling these capabilities, so they're newer in that cross-border payment space.

So generally, there is a movement to real-time payments. That's been happening for a long time on domestic rails, but now the global payments kind of ecosystems continuing to grow and so now, they're going to be available for institutions there. 

Ali Curi: Now, implementing new processes, because of regulation, always comes with its challenges. What can you tell us about the challenges that institutions face in achieving straight through processing models to support real-time payments? 

Anne Marrero: So I think when it comes to like cross-border payments, some of the processes that are definitely a bit challenging are, the fraud prevention and regulatory screening requirements that are around the payments.

These are required processes. Not all institutions have them fully automated. Whether it's the order that they do things or they might have manual checks or manual stops along the way, particularly around, let's say, fraud prevention, it's really automating these. And there are solutions around those. Whether it's changes to your processes, maybe prescreening, before something is used in a payment. Leveraging technology is probably one of the bigger things, whether that's new APIs to allow for real-time integration between systems. And then there's also enforcing data integrity up front, within the process, so that you don't have the exceptions. 

ION Ad: This episode is brought to you by ION.

At ION, our award-winning foreign exchange software solutions can help you automate and simplify forex trading processes, along with other daily operations and risk management. We provide an end-to-end solution across the front, middle, and back office, allowing you to scale, not just for FX, but for capital markets and beyond.

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Ali Curi: Now, the new ISO message standards will help with some of these challenges, right? What can you tell us about the new ISO message standards? 

Anne Marrero: That's right. So the new ISO message standard is moving to a common format. So one thing about that common format for technology people, it's like an XML type of structure.

Where each data element has its own field tag. And what that means is that when it comes to things like sanction screening, that type of integration between systems, you have less room for error. So the data is easier to check. You have fewer false negatives that allows for more STP flow.

The other thing about the standardized message is that across different payment systems, Swift or Fedwire in the U.S. for example, the messages are a common format. That means integration between systems is also easier to be done. So between just the screening and the integration between systems, there's a lot of efficiencies that are gained there.

Ali Curi: Can you go into more detail about the benefit of ISO messaging scheme with respect to how will it improve fraud prevention and compliance processes? For example, sanction screening, anti-money laundering checks, of course, in the context of FX transactions. 

Anne Marrero: So I mentioned that the ISO message format is this XML formatted message.

So each value there, so for example, values such as first name, last name, street number, that has its own data element in the message. In older standards, let's say like the SWIFT MT format standard, you'd have a name block or address block. So that information was on one line, which meant that when it came time to do like a sanctions check or, a money laundering check or whatever, you'd have to parse that information out of that block and try to get matches on it. Which is not always as effective or efficient. With a structured data format, those automated checks are much more efficient. And I mentioned, you have much fewer false negative responses. So when it comes to the screening for FX transactions for compliance purposes, having that kind of structured data makes just much more efficient and more accurate. Fewer false negatives, fewer exceptions in the process, so greater STP rates. So better for everybody. Less manual intervention in the overall process. 

Ali Curi: And now that you have shared some background on what STP is and what's driving its adoption, tell us what are some key operational efficiency and cost saving benefits that financial institutions can realize by implementing STP for FX transactions?

Anne Marrero: So I think the main thing probably is, by automation, you're getting rid of manual processes. So that means lower operating costs, which everybody's looking for. It also allows institutions to scale their businesses more easily. You don't have to add people to scale your operations.

And I mentioned too, fewer manual processes mean fewer human errors that are being introduced into the process. Fewer errors, fewer exceptions, better service to your customers. Overall, good for the business. 

Ali Curi: I think that we can all agree that data integrity in STP systems is crucial. So what measures should be taken to ensure accurate data verification and prevent discrepancies, especially with a shorter settlement period?

Anne Marrero: Anytime there's manual intervention in a process, there's going to be risk that there's errors being made. You want to really reduce the manual intervention. You want to make sure that there is good data integrity checks up front, at the very beginning of the process. And that could be validating instructions.

When somebody is going to give you a new payment instruction, there are automatic validation checks to make sure you've got the right data that's required for the payment that you're making, that there's no mistakes in that data. So all that has to happen up front so that as it comes into the straight through process, it can go straight through.

That's really where, things have to shift. Oftentimes, in the past, those checks might have been happening after the fact. So automating the steps up front, automating those validations, enforcing the validations will do that. What that means sometimes is also more self-service on the customer side.

So it puts more onus on the customer who's initiating the transaction that they're getting things right. And you need to give them the tools to make sure they're getting things right, as opposed to having it repaired further down in the process. 

Ali Curi: Now, despite the challenges of implementing STP and the hassles with new regulation, etc. What are the upsides of STP in FX transactions? What makes it so compelling for market participants and how can they position themselves to take advantage of it? 

Anne Marrero: There's a few things that are compelling. So some of the regulatory changes are going to be compelling. That's going to compel some organizations to achieve it for at least in those areas.

So that's number one. I think what I hear from a lot of our clients is the operational cost is a big one. They need to scale their business. They need to keep their costs low. So that's a big driver. And then, I think also the customer service aspect of it is really important as well to institutions, that these automated straight through processes, where there's no room for error, gives their customers really good service.

I guess in that order, whether it's a regulatory or it's the cost driven and then the service driven. 

Ali Curi: Anne, what's the one big thing you hope listeners will take away from this episode? 

Anne Marrero: We talked about the efficiency gains. I think the movement to the ISO standard is a pretty big thing in the payment space.

Having the standardized format is really going to help achieve a lot of efficiency throughout the whole process across different payment systems. And I know from a technology company's perspective, it makes our life a lot easier because we don't have to worry about all these different formats that we have to integrate with.

I think the whole industry as a whole, there'll be just general efficiency gains from that. The other thing is the new standards will help facilitate these faster settlement times because they provide the transparency, they provide the process, they help automate some of the screening processes that have to occur.

And I think just generally, just going back to just industry as a whole, it's removing complexity from the process, having a standard format across different payment channels. And so anytime you're removing complexity in a process, that's a good thing for everybody. 

Ali Curi: Great. Thank you for that.

And we're going to do a little bit of a sidebar. Let's talk about career advice. What is some advice you wish you had heard earlier in your career? 

Anne Marrero: I think for me, when I look back, I've had a long career, fortunately, that I think focusing on soft skills early in the career, everybody's very focused on making sure they know the right things, they're this and that, but I think soft skills are really important, for myself, I wish maybe I'd had a little more patience, I was a better listener, things like that. 

And then the other thing that I look back on, I think, being more proactive in setting the culture in the organization that you're in. I think everybody can play a role. One thing that I think is really important these days is, it's a team effort to achieve things and everybody's part of that team. And I think to foster encouragement on other team members. Those are probably soft skills to help others grow because as others grow, the whole team grows. That's when I look back and I think, focusing more on those things as opposed to, just getting the job done.

I think would have been helpful. 

Ali Curi: I think that's great career advice. Anne Marrero, thank you for joining us today. I hope you visit us again. 

Anne Marrero: Oh, you're very welcome. I hope to be back soon. 

Ali Curi: And that's our episode for today. And you can follow ION Markets on X and on LinkedIn. Thank you for joining us.

I'm Ali Curi. Until next time.