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Regional e-FX perspective on the Middle East

Filed in: , it, turkey, retail, foreign exchange, abu dhabi, saudi arabia, forex, regulation, trading

Electronic foreign exchange trading made a slow start in the Middle East. Take up is now well advanced in some sectors and some countries, though a lack of infrastructure, varying degrees of regulation and local civil and political disturbances paint a mixed picture across the region as a whole.

E-Forex Regional Perspective ME17

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Regional e-FX perspective on the Middle East

Electronic foreign exchange trading made a slow start in the Middle East. Take up is now well advanced in some sectors and some countries, though a lack of infrastructure, varying degrees of regulation and local civil and political disturbances paint a mixed picture across the region as a whole.

By Richard Willsher
Electronic foreign exchange trading made a slow start in the Middle East. Take up is now well advanced in some sectors and some countries, though a lack of infrastructure, varying degrees of regulation and local civil and political disturbances paint a mixed picture across the region as a whole.

If we define “Middle East” to include the entire Arabian peninsula encompassing the Gulf, Iran, Iraq, Syria, Jordan, Lebanon Turkey, Israel and Egypt, it is region with massive foreign exchange needs. On one side the largely US dollar denominated receipts from the sale of hydrocarbons, on the other the import bills for manufactured goods and infrastructure developments produce huge foreign currency liquidity while local currency requirements also need to be met. Add to these trade requirements the appetite for foreign exchange trading and speculation and the Middle East region ought to register more prominently than it does. The latest Bank for International Settlements Triennial Central Bank Survey groups Middle East and Africa as one, and last among all regions for the size of its average daily turnover in spot transactions as at April 2010 with just $13 billion out of a total of $1.8 trillion. Across all product categories the region accounts for $41 billion out of $5 trillion globally.

Yet look below the surface to the economics of individual countries and stats from the International Energy Agency show that in 2009 Saudi Arabia was the world’s largest net exporter of crude oil with Iran, United Arab Emirates (UAE), Iraq and Kuwait all in the top ten. Similarly Qatar is third in the league table of net exporters of natural gas. These countries’ continuing currency inflows seem assured given their vast reserves and the inexorable rise in the cost of energy. Moreover, companies that operate in the region, especially in the oil and gas sector, logistics, transport and financial services are world leaders with sophisticated understanding of treasury management, including the use of foreign exchange operations and electronic management and trading tools.

What quickly becomes clear however is the fragmented and patchy nature of both FX e-trading in the region and the legislative and technical infrastructure that facilitates it country by country. Generalisations about the region have to give way to
country specifics and to business models and products geared to segmented client groups.

Buy-side clients and business models
“We have a double coverage model,” explains Deutsche Bank’s Head of CEEMEA FX sales Amine Berraoui. “As a bank we cover both financial institutions and corporates. Ourcorporate franchise follows our footprint and geographical
presence. We have a fully- fledged license at DIFC in Dubai as an offshore bank. We have an onshore license in Abu Dhabi. We have a presence in Qatar, and a local presence in Saudi. The rest of the countries we didn’t feel it necessary to have a local presence in and we cover out of London. Our strongest markets in the region are UAE and Saudi Arabia.”

Barraoui’s colleague Robert Wade, who is head of electronic FX corporate sales for EMEA & Americas, says that the bank’s Autobahn platform is an expanding franchise. “As the sophistication level of our clients increases they are making greater use of Autobahn. This applies to the largest of local corporates. They are looking for simple, easy workflow. Everything else is covered out of our voice team. But interest in electronic is absolutely growing.”

“The Middle East is a region where you have some of the largest sovereign wealth funds and some central banks with significant liquidity,” adds Barraoui. “These are looking for more and more services especially those that are electronically delivered, so I see our FX platform, other platforms and other electronic services being well positioned for growth.”

This view is echoed by Citi’s Sandip Sen, CEEMEA Corporate e-Sales Head. “Most of government-owned companies as well as corporate firms have adopted electronic trading over the last few years mainly for non local currency FX exposures. The constant demand for best execution, coupled with integrated pre and post trade services, reinforces the need and hence the growth in the use of electronic trading channels.”

Tod Van Name, global head of Bloomberg Foreign Exchange says that the Middle East as a whole has lagged in the adoption of e-trading, but this is changing quickly. “Many large corporations in the region are analysing their treasury management systems and are looking at how e-commerce can address issues like best execution and audit trails. Corporate treasurers are turning to multi-bank platforms, like Bloomberg FXGO, to manage their FX risk, make requests for quotes and execute their FX trades, thereby minimizing the manual processing of transactions.”

This is forcing competition upon forex platform providers. Van Name adds, “Institutional buy-side clients in the Middle East have banking relationships with local and international banks, which cater
to clients’ FX requirements by different means. Whereas the majority of FX business conducted with local banks is executed traditionally, over the phone, large international banks are responding to increasing market demand for electronic platforms and e-commerce services. This shift towards e-trading is driving larger local banks to invest in e-commerce offerings, and we expect to see them start providing their own e-trading solutions to their buy-side clients.”

This view is corroborated by Johnny Nielsen, head of institutional business in Middle East region at Saxo Bank. “We have remarked a strong interest in the relation to our White Label solution, actually from most of the Middle East region. We have recently seen increasing interest for non-domestic markets, in particular for international equities, futures and FX, all of which are available to trade via our award winning platforms in a single account.”

“Our White Label solutions are also receiving increasing attention from non-retail end users, including funds, private banks and bank trading desks” Nielsen continues. “This is further supported by our investments in Saxo Direct – an API (application programming interface) liquidity offering tailored to retail brokers, asset managers and hedge funds. All clients are essentially looking for similar ingredients to ensure that their trading needs are met: transparency, efficient execution, standardized pricing and anonymous trading. Moreover, they want quality service from market professionals as well as a reputable partner.”

“There has been a definite shift of the large corporates and a good chunk of the interbank market towards multibank providers, like ours,” says Alex Johnson, sales manager Middle East/Africa at 360T. “The role of the treasurer in the Middle East has changed dramatically in recent years. The treasurer of today faces more challenges and needs, and uses a broad range of tools to help him manage his company’s exposure and finances. Key requirements such as efficient straight through processing (STP) to treasury management systems and audit logs of quote histories necessitate electronic trading. At 360T, we have concentrated on speaking to and gaining local market makers onto the platform as well as the traditional global players, thereby giving clients a choice of banks. Many large corporates especially seem to have developed very quickly in the past couple of years in this respect, leapfrogging some evolutionary stages that European or American corporates went through on their journey. They have even jumped to using the intra-group tool, which allows a central treasury to manage, control and execute requests of satellite subsidiaries.”

Regulation, relationships and Shariya law
So the large corporate and institutional sectors across the region as a whole represent a significant and growing market. This is being addressed by major international banks and platform providers and the local banks are playing catch up, well aware that electronically delivered services are the way forward and they need to compete. However no one is saying that the region is an easy one in which to build e-business, not least because of restrictions and regulation of forex trading.

“The most important thing about forex trading at the moment is regulation,” explains Ahmad Khatib, CEO of Beirut based Amana Capital. “Regulation is not uniform. Some countries have little or no regulation others impose restrictions.Lebanon,
for example, has a very strong financial sector historically and was advanced in introducing a regulatory regime for foreign and regional investors. The UAE has introduced licensing for foreign exchange trading offshore. Then Saudi Arabia has the largest number of potential traders but
no licensing. Therefore many clients work on-line.”

Add to this the traditional, cautious Middle Eastern approach to business based on relationships and the need for transparency, and this can pose problems both for dealing with financial brands that may be well known in the west but not locally and also embracing new technologies which offer no human interaction. This is particularly true of the retail sector, where FX Solutions has been building its business since 2004.

“We at FX Solutions recognize that everything with regard to the Middle East is based on trust and reputation. Bottom line, the relationship is key,” says CEO Michael Cairns. “The market in the Middle East is relationship driven and the role of the introducing broker (IB) in forging those relationships cannot
be underestimated. From the outset we decided to utilize the IB network and our IB partners have helped contribute to our growth and success in the retail sector. They are our sales force on the ground for the most part. For example”, he continues, “a
typical client will visit a company’s website but then go and talk to someone who has done business with that company. That someone is usually an IB. It’s word of mouth, it’s validation. Blogs and forums are very important, perception is everything. People are concerned about the safety of their funds and won’t just sign up on-line without doing a background check. If they know someone who knows us, who recommends us, then they feel more comfortable and are likely to open an account. It helps that FX Solutions has worked hard to build a strong brand and a
reputation based on innovation, on fairness and on total transparency.”

Cairns adds, “FX Solutions has hadparticular success in Saudi Arabia but it was, and is, important to slowly build confidence among regulators in order to be able to gain credibility. In Saudi Arabia the monetary authority is understandably very wary of new markets. There is intense scrutiny of business practices and participants with a view to both protecting their citizens and making sure that their laws and regulations are upheld. The onus is on us to convince the authorities that we deserve their trust. This in itself isn’t a bad thing. A history of regulatory compliance is vitally important in this regard and it helps to point to our record in the US, where we are registered with the CFTC and an NFA member, and the UK (FSA). Saudi Arabia remains very strict financially and the barrier to entry is high. Apart from anything else, a company requires more regulatory capital to register in Saudi Arabia than to register in the US. It’s not only the money, the relationships are important also. That being said, we’ve seen encouraging signs in the past few years that the retail forex market is perhaps opening up and gaining acceptance. FX Solutions has participated in several trade shows where interest in our product was high. Perhaps the door, whilst not fully open, is slightly ajar?”

Although the common perception may be that Islamic or Shariya principles restrict the development of forex trading in the region, this is not a consistent picture and is surrounded in uncertainty and lack of clarity. There are a number of approaches to this issue.

“Shariya in general does not give one a clear set of rules governing forex trading,” says Amana Capital’s Ahmad Khatib. “Forex is relatively new and there is a lot of client demand. What discussion there is, is about swaps and interest rate products. Regarding speculation, anything undertaken without proper knowledge and understanding would be speculative and would necessarily fall foul of Shariya principles on gambling. That is why we offer educational services alongside our technical products and services.”

FX Solutions has consistently adopted a cautious and respectful strategy where Shariya is concerned. “Over the years, we have spoken with many of our partners in the region who happen to be religious scholars and have sought their advice on how best to approach this market,” says Michael Cairns. “These discussions, for example, led to our providing “interest-free” accounts to clients in the region. Whilst we have done our due diligence to provide Shariya compliant markets we are aware that our clients have also done their own due diligence. Many of our IBs provide online tools to assist clients in this regard.”

“The electronic aspect of Shariya-compliant trading is still nascent,” says Tod Van Name of Bloomberg Foreign Exchange, “because market players do not have the scale and footprint to warrant investment in the technology required to offer FX and deposit- executable prices. Bloomberg offers a wide range of information, news and data on the Islamic capital markets, and is working on integrating Shariya- compliant products, such as Islamic deposits, into Bloomberg’s multi-bank trading platform. This will enable market participants to conduct business on an electronic platform without the financial and resource investments they would normally need to make.”

“Shariya products are by definition a very important area,” explains Saxo’s Nielsen, “however FX trading is more than a question of interest rates. Aspects such as margin trading, shorting etc have also to be taken into consideration. Any introduction of Shariya compliant products will be in close cooperation with bodies that ensure the compliance of the offering. On other instruments, such as equities we have recently given clients the possibility of analyzing equities to monitor their compliance. This feature has been very well received and indicated the strong interest for such products.”

Meanwhile 360T has also taken a pro-active approach, “We have launched an Islamic Multibank Trading Portal for FX Spot offering Islamic banks and corporations the opportunity to embrace electronic trading whilst adhering to Shariya principles,” says Alex Johnson.
“We were the first and, until now, the only multibank platform provider to offer an Islamic Platform.”

Retail FX
Talking to people active in providing FX trading services in the Middle East region also produces a more pragmatic approach to Shariya-approved trading. In essence clients, particularly on the retail side, for whom Islamic principles are important will either choose approved products and structures or will not trade. Others who are less concerned will use available platforms and perhaps offshore centres, such as Cyprus, to trade as they wish. Traders and investors will let conscience be their guide. What is clear is that retail customers across the region are increasingly attracted to the simplicity, and perhaps the excitement, of trading forex on their own account by electronic means.

“Retail / day traders are a group that is expanding rapidly having started late,” says Ahmad Khatib at Amana Capital. “Now they are looking for mobile trading capability through phone and tablets requiring no minimum account size. Unlike international banks, regional banks have not really taken this up.”

This view is echoed by FX Solutions’ Cairns who also notes that client types differ significantly market-to- market. Retail traders in Saudi Arabia tend to be a mix of individuals and successful business people, some extremely wealthy. Account sizes tend to be larger than the norm which, in turn, leads to larger deal ticket size. In Egypt, where trading is very active, the client base typically comprises more of those who start trading with minimum account sizes of $250-$1,000 utilizing FX Solutions’ available leverage of up to 400:1. “We see Egypt as more lower equity accounts but with a lot of traders. The accounts may be smaller but they tend to be more active. In Saudi, by contrast, we have clients who are trading very large positions, some probably larger than the banks – you are talking €50m - €100m at a clip,” Cairns explains.

“In Saudi,” he continues, “there is a tremendous quest for knowledge and an embracing of the latest technology. They are very interested in technical analysis and like to use charts to help with their trading decisions. The UAE, although seemingly more westernised, doesn’t produce a huge number of individuals looking to trade right now but we are actively targeting that region. With Lebanon, on the other hand, the issue is more one of (US and UK) government restrictions on accepting clients from that country, possibly due to its proximity to Syria. We are bound by the laws and regulations, not only of those counties in which we operate, but of those countries in which we are registered and regulated. If you look at Turkey you have a similar trading mentality as that in Egypt or Saudi Arabia but the government there has clamped down on firms operating without a physical presence in Turkey and without registration. They have made registration extremely difficult and costly. Things can change dramatically but in the countries where we are most accepted there seems to be a willingness to embrace what we do. They’d rather
be part of it and regulate it rather than force it out of existence with restrictions.”

Another reason for the popularity of retail trading of forex has been disappointment with other asset classes. “Retail traders and investors have not seen great returns from local stock markets over the past few years,” notes Michael Rautmann, Head of Marketplaces, FX&FI for Middle East Africa and Russia, Thomson Reuters. “This has led to an increase in the number of participants in the FX market, and since many of these investors are already used to using electronic platforms to trade equities, a switch to FX is relatively simple.”

Moreover, Bloomberg’s Tod Van Name adds that there is a large appetite for risk in the Middle East retail market where traders operating across time zones look to their FX providers to offer 24-hour trading without loss of liquidity. However while the retail sector largely trades the major currency pairs there is some appetite for links with other asset classes such as commodities, futures and stock indices.

Specialised services
At the other end of the scale, development of wholesale services such as prime brokerage and growth in high performance algorithmic and high frequency trading seems not to have reached its tipping point as yet. “Algorithmic and programmatic trading has become extremely popular globally, but less so regionally as volumes are still relatively low,” says Rautmann. “We have however seen a move to liquidity aggregation – tools, such as Thomson Reuters Dealing Aggregator and FXall, which allow FX traders to view all of the various sources of liquidity on one screen. As aggregation gains popularity in the region overall liquidity will increase, traders will start to embed aggregation in their strategies, and this will encourage more price makers to participate in the market and therefore drive algorithmic trading in the future. Bilateral credit has also been a problem for medium to smaller financial institutions in the Gulf, which make PB offerings attractive.”

Bloomberg’s Van Name believes that these markets are well starred for future growth. “In a global market where Western financial institutions continue to suffer from reduced lending, defaults, rogue trading and economic contractions, many firms are seeking business relationships with Middle East banks offering superior credit positions and ratings. These institutions are taking advantage of these global shifts and establishing specialist services such as PB divisions. It is likely that in the near future, new regional players will emerge offering PB and HFT services to the FX market,” he concludes.

“There is some interest for FX algo trading and this seems to be growing more recently,” echoes Citi’s Eugenia Hanoune, EMEA Institutional e-Sales Head. “HFT is not as prevalent in the Middle East as in the western markets. As volumes and processing time for trades increase, the conversations about Prime Brokerage seem to be happening more and more. There is a feeling that many more firms will require Prime Brokerage services in future.”

Future prospects
Everyone we spoke to in our research for this regional perspective was upbeat about the rate at which interest in forex products and their electronic delivery was growing. There was general optimism about how the Middle East still had some distance to go before it fulfilled its potential but there are some headwinds. Some of these originate in the region itself and others from beyond its shores.

From the countries themselves comes fears about political stability. Syria, Iraq, Iran, Bahrain and Egypt are all the subject of upheavals or circumstances the outcomes of which are uncertain. Lebanon while stable itself and a favourite business and financial centre for the Middle East has also seen initial overspill of tension from the conflict in Syria which the Lebanese authorities have been keen to staunch and quell.

Several commentators have suggested that the turmoil in Bahrain has put the brakes on its growth potential as a leading Gulf finance and banking centre. Others have suggested that the financial crisis linked to the property crash in Dubai may have damaged it as well, if only temporarily.

Meanwhile as countries such as Jordan, Lebanon and Israel (see panel) among others have sought to introduce greater regulation across financial markets in general, including over the counter (OTC) forex and derivatives, the winds of regulatory change have often blown in from abroad.

“There is uncertainty of the impact that regulation, particularly in relation to OTC derivatives trading recommended for G20 countries, such as those required by the Dodd Frank Act in the US,” says Thomson Reuters’ Michael Rautmann. “These G20 reforms look to change the OTC derivatives trading workflow, increase transparency, and create greater supervision of banks.With Saudi Arabia being part of the G20 and with the UAE Central Bank advising regional banks to meet liquidity requirements by 2013, in preparation for Basel III, the regulatory impact on regional markets cannot be discounted.”

Many regional financial institutions need to not only understand how local regulation will affect their participation in FX markets, but also how it affects their relationships with financial institutions who they trade with based in Europe or the US. There may be no local regulations governing OTC derivatives trading in a specific country, however a bank’s international counterparty could be forced by legislation to trade on a regulated platform.

This not only creates complications for financial service institutions but also the providers of trading tools to these organisations. For this reason Thomson Reuters has worked closely with legislators and regulators to ensure that we fully understand the policy goals and proposed changes, and we will be registering our Thomson Reuters Dealing product as a regulated service in Europe (MTF) and in the US (SEF).”

An additional headwind is the state of the communications infrastructure in some geographies. “In the Middle East and Africa the connectivity issues are still there,” according to Deutsche’s Robert Wade. “It varies country to country. Where the infrastructure is not as good, you often see clients and banks investing in dedicated lines, leased lines etc. to provide connectivity. Over time, as governments continue to invest further in their infrastructure, this will just enhance the capability that is available to clients across the region. Most of the large institutional players would have dedicated lines. The ones that are most impacted would be mid-market or local corporates. We have infrastructure, resources and people in the Middle East. We are investing in our platform globally. We believe that there are good growth prospects in the region in general particularly in UAE and Saudi.”

“National communication infrastructure will play a critical part in defining the market,” believes Bloomberg’s Tod Van Name, “creating natural “hotspots” and “notspots,” as the gap widens between countries with fast and reliable Internet connections and those without.” Those with good infrastructure include Gulf states such as Dubai, Abu Dhabi and Qatar while by common consent Saudi Arabia is making huge efforts to upgrade its telecoms capabilities.

Growth and product development
On the back of this the range of products on offer across the region is set to grow significantly from vanilla spot and forward between the majors. Johnny Nielsen of Saxo says he sees further growth opportunities in the majors (FX Spot) as well as spot metals and oil futures. “We recognize further growth opportunities in other assets classes such as CFD commodities and contract options. Our White Label solution enables end-users to bring their existing portfolios to the platform and seamlessly expand their trading activities into other asset classes. Having a broad white label client base in the Middle East, EU, APAC and Eastern Europe, spot FX trading and bespoke currency availability is essential. Expanding our exotics and precious metals offering such as AED, BHD, QAR, KWD, SAR, OMR, JOD, RUB, HUF, RON, LTL, PLN, CZK, MXN, ZAR, HKD, XAU and XAG helps us meet our clients’ localized product needs. With more than 160 crosses including all majors, spot metals and regional exotics Saxo Bank’s liquidity distribution services generate EUR 2,160 billion in annual FX volumes.”

So far the only exchange offering currency futures in the Middle East is the Dubai Gold & Commodities Exchange (DGCX), where, according to 360T’s Alex Johnson, volumes are thin. “Most trading is OTC and predominantly in vanilla products. Some more sophisticated corporates are involved in structured options but this is by no means a big market.” However with the growing power and sophistication of large corporates, central banks and sovereign wealth funds in the region these could be set for growth.

Across the region there is no doubt that we can expect further development of forex products on e-platforms. One issue that constantly arises, especially in light of regulatory change, local restrictions and political unrest is the extent to which trading generated by Middle Eastern clients of all shapes and sizes from major corporates to retail traders will remain onshore or be conducted through major global financial centres such as London or New York or offshore centres such as Cyprus. E-trading capabilities can facilitate this process and removes the need for “regionalization” of trading. That however is as difficult to quantify as itis for local authorities to control, and is the subject, perhaps, of another story altogether.

Regional e-FX perspective on Latin America

Filed in: banks, trade, latin america, foreign exchange, forex, fx, chile, e-forex, trading, ndf

Global trade, local politics and regulation are the factors that most influence electronic foreign exchange trading in Latin America, while south of the US border the market is as rich and diverse as the countries that comprise the region.

E-Forex Regional Perspective Latam

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Global trade, local politics and regulation are the
factors that most influence electronic foreign
exchange trading in Latin America, while south of
the US border the market is as rich and diverse
as the countries that comprise the region.

In many ways Mexico is the role model. The
Mexican peso is now the fourteenth most traded
currency, according to the most recent Bank for
International Settlements Triennial Central Bank
Survey. Its share of average daily turnover in global
foreign exchange markets in April 2010 stood at
1.3%, so while it is far from being a major currency,
it does register alongside the Norwegian krone
and ahead of the Indian rupee, Russian rouble and
Chinese renminbi. Mexico leads the Latin American
pack, and is the biggest of the “big five” followed by
Brazil, Chile, Colombia and Peru. Mexico leads not
only in terms of size of turnover, but as a country
that over the last three decades has been through the
mill of indebtedness, default and rehabilitation with
the most developed nations’ financial community
and then full currency liberalisation with
membership of the wealthier countries
club, the Organisation of Economic
Co-operation and Development
(OECD). It is a path that other
Latin countries have yet to
follow to its end.
Lessons from Mexico
“Mexico’s presence within
the North American Free
Trade Association (NAFTA)
definitely opened things up,”
explains Simon Jones head of FX
e-trading at Citi. “We treat Mexico
just as we would treat Swiss francs or
“Mexico is in many ways a developed
centre. I don’t think we can call Mexico an
emerging market anymore,” says Matt O’Hara,
senior vice president and global head of business
operations at Thomson Reuters. “It’s an emerged and
developed centre. They have been faster adopters of
technology in order to enable their connectivity and
internationalisation. Thomson Reuters worked with
the Mexican authorities to help them meet their
internationalisation goals. We helped them do that
with our matching service, our interbank electronic
brokerage platform, which if you fast-forward to the
present day is now seeing a significant amount of
global liquidity. We are considered to be the primary
pool of liquidity and the reference rate for the
Mexican peso. Around 80% of all Mexican volume is
traded outside Mexico which shows the power of the
forex market when a domestic community that was
previously closed, opens up and connects to the global
market place. It has grown hugely and is significantly
traded in places like London and New York.”
That said, even in Mexico, local regulations can seem
cumbersome if you are used to market conditions in
Europe or the US. For this reason, says Michael Bernal,
sales director for Latin America at FXall, multibank
platforms have additional appeal. “It is not only for
transparency and pricing that multibank platforms are
used, but also for their pre- and post-trade execution
capabilities with end-to-end processing and connectivity
to corporate treasury management systems. This
enables them to reduce or eliminate manual interface
in the processing of the transactions. For example the
“know your customer” regulations in Mexico are quite
different than they are in the US. You actually have to
visit the customer at their place of business as part of
the process” This is a theme that recurs again and again
when you examine forex trading conditions throughout
the LATAM region.
If Mexico is the role model, it is Brazil that those
inside the Latin American theatre and in financial
markets worldwide are watching most attentively.
The size of its economy, the power of its wealth
generation capacity, its rich reserves of natural
resources and agricultural production and its booming
international trade relations, particularly with China,
point to a market that offers massive opportunities for
foreign exchange trading. That the bulk of this will in turn migrate to electronic transacting seems inevitable
and indeed the only practical way forward that can
efficiently handle demand. However, the Brazilian
monetary authorities are fully alive to the risks they
face in what they term “currency wars.”
“Brazil is cautious because of the demand for inflow
of capital,” says FXall’s Michael Bernal. “Brazil does
not want the Real to appreciate so much that the
currency becomes too strong. Over the next five to
ten years regulation will slowly change to allow Brazil’s
own internal market to trade more freely but in the
meantime regulation is protecting the economy from
Which is by no means the same thing as saying they
are not open to ideas and progressive in their adoption
of technology.
“Both Brazil and Chile are set to see further growth
in the use of electronic trading systems because these
are countries where volumes are growing at very fast
pace,” according to Ernesto Semedo, Sales Manager
LATAM from 360T. “The adoption of technology is a
necessary requirement to keep pace with the increasing
Most people we spoke to agree with this. “Brazil
seems to everyone an obvious growth market for eFX
Channels,” agrees Debra Lodge, HSBC’s managing
director and head of eFX sales and strategy for Latin
America. “Interestingly enough, there are only three
players, HSBC being one of them, that offer a locally
tailored solution and we expect to see major volume
growth over these platforms in 2012. As of yet, very
few multilateral channels have been able to mark their
presence in this market, mostly due to lack of local
liquidity providers and the value of bilateral relationships
with credit worthy institutions. Over the next couple
of years we do expect more local players to release their
own single dealer platforms (SDPs) plus enhancements
by major international players to their offerings to cater
to the often complex onshore BRL market.”
Chile has long been regarded as Latin America’s
economic model state. In particular the country’s
revenues from the mining and sale of copper, its
relatively small population and the richness of its
farming and fishing industries have been for the most
part well managed. Its US educated economists have
established basic rules and infrastructure that place
Chile among the top emerging market credits.
“A broad spectrum of clients in Chile have embraced
eFX channels, market regulation is not overly
restrictive, and we expect competitors will see this as
an obvious target market after Mexico for both SDPs
and multi dealer platforms (MDPs),” adds Debra

Citi’s Simon Jones notes that while the Chilean peso
is generally traded in the form of non-deliverable
forwards, he adds that Chile “would be a great case
study of a Latin America country if it opened its
markets up for deliverability.” If and when Chilean,
and indeed Brazilian currencies will become fully
deliverable is a moot point. But the consensus does
seem to be driving towards greater openness and less
regulation in due course.
Colombia and Peru
Both smaller in terms of potential market, Colombia
and Peru are following a similar path to Chile in
terms of their commodity-dependent economies
and currency pursuing an internationalising agenda.
Interestingly as Thomson Reuters’ Matt O’Hara points
out, these markets already have a regulatory regime
which, when viewed positively, are ahead of markets
in Europe and United States. “Latin America is in
many ways ahead of the game when it comes to the
infrastructure and connectivity and the regulations,”
he explains. “There is an OTC spot market which is
then cleared through the local exchanges in Chile and
Colombia for example, and they are registered to the
superintendencias, their regulators. The same is true in
Argentina as well.”
He adds that there has been a good deal of work done
in countries like Colombia and Chile to overhaul their
regulatory regimes such that their ability to embrace
technological change and move towards open and
transparent international trading in their currencies
when appropriate, will be well advanced.
Meanwhile, although Peru may be further behind
the curve than some of its bigger neighbours, its
prospects look encouraging. “Peru presents an exciting
opportunity for the future for eFX channels,” says
HSBC’s Debra Lodge. “A dual currency economy
(USD and PEN), and as of 2011, one of the fastest
growing economies in the world, Peru remains one
of the largest commodities producers and exporters,
attracting investment from numerous multinational
Drivers and products
History plays an important role in understanding
Latin American countries’ attitudes towards their
currencies and to liberalising the markets in them.
There is not a country in the region that has not at
some stage over the last three decades or so experienced
boom and bust. Boom in commodity prices; boom in
foreign investment; boom in currency inflows and the
euphoria associated with each of these. However, the
same countries have experienced political turbulence,
commodity price collapse, over-indebtedness driven by
international banks, corruption and exodus of flight
capital. The way in which Latin American currencies are
regulated today in all the significant countries, with the
exception of Mexico, needs to be viewed through this
lens. Countries like Brazil, Chile and Colombia but also
Argentina and Venezuela, wish to be masters of their
own destinies rather than slaves of the international
markets. Only their methods of going about it and their
political motivations may differ.
Having said this, the region’s most successful economies
are dependent on primary industries of mining, oils and
gas, and agriculture and livestock farming to generate
foreign currency revenues. Hence the most important
driver for foreign exchange trading is real trade.
“A large part of the commercial FX market in
july 2012 e-FOREX | 63
LATAM is driven by imports and exports,” explains
HSBC’s Debra Lodge, “and having a good standing
relationship with a bank is one of the determining
factors for transacting business.”
Spot and limited maturity forward transactions meet
the needs of most businesses. On the whole there is
relatively little speculative foreign exchange trading –
though there is some, of which more later.
“Clients in Latin America use the same set of things
clients in North America or Europe use,” explains
Caio Blasco, Deutsche Bank’s director of LATAM
e-commerce sales based in Sao Paolo. “However, e-FX
in the region is still some steps behind as clients are
learning about algorithmic execution. Usually, what
differentiates them is the number of currencies they
trade, with the caveat that most currencies traded in
LATAM are restricted by nature (BRL, CLP, COP, etc).”
Banks such as Deutsche, Citi and HSBC, but also
other platform providers have combined their ability
to provide first voice but then electronic platforms
with the ability to provide the administration that is
generated by the need to meet local exchange control
Citi’s Al Saeed is project manager for their cross
asset and research portal Velocity. “To execute an
FX transaction in these countries involves an entire
workflow. There may be heaps of documentation to
process and approve and very few people do that.
“Our corporate platform, FX Pulse, automates all of
the regulatory requirements for places like Brazil. You
have to describe whether the underlying trade is an
import or an export, there’s tax to be calculated. It’s
the same in Colombia where there is a tax calculation
of every FX transaction. In Argentina there is an entire
workflow for collecting documentation, making sure
everything is in order, that the FX transaction is off
the back of genuine trade rather than speculation
before it’s approved.”
FXall’s Michael Bernal agrees with the premise of the
importance of value added beyond facilitating trading.
“We’ve found that corporates have been driven to our
platforms by our automated processing which eliminates
the need to send faxes, phone or e-mail confirmations.
Instead confirmation is sent from the bank via SWIFT’s
messaging to the corporation. This means that payments
are made automatically.”
Against a background of the regulatory need for forex
transactions to be linked to real trade flows, it is not
surprising that the range of instruments beyond spot
and forwards are relatively undeveloped. Consequently,
NDF products have grown up offshore. ICAP for
example offers NDFs in ARS, BRL, CLP, COP and
PEN and Thomson Reuters has supported the largest
community of Latam and Global NDF traders on
its Dealing platform since
NDF’s were first introduced
to the market. But this is by
no means the whole story
as Thomson Reuters Matt
O’Hara explains.
“The foreign exchange market
in Brazil, for example, grew
as a futures market, primarily traded on the BM&F market. There is a domestic spot
market and we see that growing, but the majority of the
liquidity is in the futures market just as there is liquidity
in the NDF market offshore. So there are domestic
capabilities in Brazil that work very well and electronic
in nature. Then in Chile there are domestic trading
platforms that are for the domestic spot market which
have relationships with the local bolsas – or exchanges.”
We will look at regulatory issues in more detail
later, but there are two other important areas that
are in growth phase as far as electronic capabilities
are concerned. The first is in speculative money and
second is in retail. These are both “emerging markets”
in their own right.
Prime brokerage and hedge funds
“There is not a lot of movement in the G10 space at
the moment,” says Citi’s Simon Jones. “There has been
central bank guidance in CHF and JPY, EUR / USD
has hovered either side of 1.30 all year, threatening
much but delivering little. For a long while now
our customers have been looking for other areas of
interest. Brazil, Chile, Colombia and Peru to some
extent, while among the deliverables, Mexico is our
biggest pair in the emerging market space. The
majority of the market is Asset Driven or Speculative
flow with spot and forwards against the dollar
accounting for the bulk of it.”
He goes on to add that where such flows are
provided by hedge funds they are accustomed to
using electronic trading platforms and expect them
to be available where Latin American currencies are
FXall’s Michael Bernal sees developments in the prime
brokerage area. “On the prime brokerage side we are
definitely seeing more high frequency traders (HFT)
using prime brokers for liquidity and credit purposes.
We are also seeing a very careful selection process with
regards to who HFTs are using for prime brokerage as
they tend to concentrate their exposures with only one
or two institutions. There has been a strong growth in
PB business in LATAM over the last couple of years,
offered by the 5 – 10 major US and global institutions
with a strong presence in LATAM.”
“We currently have a number of LATAM hedge
funds based mainly in Rio de Janeiro, São Paulo and
Santiago trading FX through our platform,” says Deutsche’s Caio Blasco. “We are experiencing decent
growth from those clients as it is a new asset class in
this region. In the HFT space, there are few players,
as the restricted nature of their main currencies make
HFT challenging. At the same time we believe that
prime brokerage is generally still under used in the
region. The cross margin ability and netting facilities
that an FX prime broker can offer clients can make
execution much smoother while requiring fewer
margin allocated to different banks.”
This view is corroborated by Joseph Conlan Global
Head of Sales at New York-based FC Stone LLC
which provides clients with trading and execution
services in a range of asset classes. “Prime brokerage
is just gaining traction in the region, allowing
participants to trade on the best rates market-wide,
as opposed to being captive clients. HFT and algo
trading will have an impact as more participants
migrate to open markets and dark pools.”
Debra Lodge also notes that prime brokerage is
significant growth area for HSBC, “Prime Brokerage
services are beginning to emerge in Brazil, and we
expect this business to become more prevalent with
the local hedge fund community in the near future.
HSBC is a large organisation with deep capabilities
in a lot of geographies and products, we aim to be
ready with such products as and when these emerging
markets dictate.” Her colleague Jacqueline Liau global
head of FX prime product and service adds, “We are
already live and servicing clients in Brazil with our
FX prime brokerage platform and continue to expand
our base. Local knowledge has been paramount to
ensuring our tools and technology are adequate for
this market.”
Retail FX
If the smart money is just beginning to show an
interest in LATAM and accessing it by electronic
means, it is not surprising that the retail market seems
to be relatively undeveloped as yet. This is also a
market that brings with it some complexities.
“In much of Latin America the retail FX market
is fed by remittances of emigrants, tourism and, unfortunately, illicit money from drug trafficking and
organised crime,” says Financial Software Systems’
Leigh Ann Wolfe director of new business development
Latin America and the Caribbean. “To combat some
of the negative aspects of FX trading, authorities in
Latin America are increasingly erecting obstacles to
the growth of the FX market. To the extent that the
retail FX trading market grows in Latin America,
sophisticated Latin American investors and traders will
want all of the features that investors around the world
expect and demand in FX trading platforms.”
Experience at Citi seems to suggest that the market
interest also lies elsewhere as well as in pure forex.
“We do see some interest in retail trading in Brazil,”
explains Al Saeed, “but if you ask the retail providers
where the interest has been over the last 12-18 months
they will tell you it has been more in metals than in
The market in platforms and technology shows plenty
of potential according to Ernesto Semedo of 360T,
“Retail FX has been growing at a very good rate,
although in some countries the marketing and sale
of these systems are prohibited by law. Nonetheless,
interest continues to grow on the part of individuals
with a strong interest from Brazil.”
In summary, Luis Simões Pereira Head of Retail Sales
in Latin America for Saxo Bank says, “Retail FX
has been developing steadily, although facing some
challenges. The multitude of Ponzi schemes across the
region left some scars on the investors and regulation
is in some cases complex or unclear. Across the board
investors are looking for information and educational
material and as they feel more confident, we are seeing
growing rates of adoption. The European crisis has
also played a role as there is a growing interest in the
development of events in the continent and a growing
will to speculate on the European currency(ies). In any
event, active traders have pretty much the same set
of interests as their European counterparts – pricing,
margins and speed of execution are paramount.”
Regulation, regulation, regulation
For all the complexities and complications of trading
foreign exchange in LATAM, market participants
highlight regulation as the biggest single barrier and
opportunity to development of e-trading.
That regulation is coming from both local markets
and developed ones is good news and bad news as
Saxo’s Luis Simões Pereira explains, “In several Latin
American countries, we have observed a growing
openness in the regulatory framework towards
the FX market. Either through specific regulation
or tacit approval, in a number of countries, it has
become common to trade FX as any other asset class.
However, the crisis hitting the developed countries has resurfaced some fears among the most important
economies, that could set back the path towards a
liberalization of the FX market.”
FXall’s Michael Bernal sees a divergence of regulation,
with some countries loosening controls while others
are becoming more stringent. “You see relaxation
of regulations in Brazil, then you see an increase
in regulation in Argentina and Venezuela. Even in
Mexico there are some regulations that are being
placed on funds for financial reporting purposes. The
position reporting carried out in the US or in Europe
is now being emulated in LATAM. This type of
regulation is more of an accumulation of information
of the financial risks that a country’s institutions are
facing. In places such as Argentina and Venezuela
regulation exists for purposes of expropriation and
government control. This sort of regulation is likely to
impact capital flows.”
The use of electronic trading platforms and capabilities
is increasing in response to such regulation as well to
customer demand. Greater compliance and reporting
demands more efficient connection from front to back
office using up-to-date electronic tools.
However, in some ways the development of reporting
requirements in Mexico and the move towards greater
market transparency is waiting on the more developed
markets to provide a lead. This is surely coming
according to Thomson Reuters’ Matt O’Hara. “Short
term I think the local market has to understand and
prepare for the changes that are inevitably coming in
the future. None of us know when these changes are
going to happen or what exactly they will contain.
But we’ve got a pretty good idea of what is going to
happen around certain OTC derivative instruments.
The paradigm is going to change. And with LATAM
they trade with the regions and jurisdictions that are
going to be impacted by these new regulations and so
they need to be ready for that.”
This also impacts the rate of innovation in the region
as a whole. “The market has had to spend a lot of time
and money, resources and investment on making sure
that they can continue to operate and comply with
the new regulations,” O’Hara continues. “That means
that the balance of innovations, especially around
proprietary trading platforms, macro-based electronic
trading platforms has had to slow down to make sure
they can be compliant. That’s something that the local
market absolutely has to understand and be working
on. There’s a lot more education and awareness around
and regulatory compliance to make sure that they’re
ready. Long term, when these regulations actually come
in there are certain instruments that we believe and
the market understands are going to be caught up in
these regulations. NDFs for example. That is a primary
trading instrument and hedging tool for LATAM. If
NDFs have to be traded in a different way in order to
meet these regulations then this is something that the
local market needs to be preparing for.”
Price transparency
Citi’s Simon Jones says bodies of regulation such as,
Dodd Frank and MiFID that affect developing world
currencies, as well as various localised regulations that
are coming from Asia, will lead to price transparency
that we haven’t seen in LATAM before. He says,
“This will open up the market for more hedge fund
involvement and will give price transparency to the
corporate and real money community that will be
good for business. This will happen in the next 6-18
months. Ultimately the liberalisation of currencies in
the BRICS or elsewhere is an inevitability. Knowing when this will happen is very difficult. You are
definitely seeing steps in Brazil and China to pave
the way for the day when their currencies become
deliverable as in Mexico, the United States and the
United Kingdom etc.”
However, the process need not be that traumatic for
LATAM countries. “There are many opportunities for
cooperation in Latin America,” says Tod van Name,
global head of FX Products, Bloomberg LP, “including
a new regional exchange created by the integration
of the exchanges of Chile, Colombia and Peru into a
single marketplace called MILA (Mercado Integrado
Latino Americano). The Bolsa de Santiago (Chile) is
also speaking with Brazil’s BMF Bovespa about sharing
technology. From an interbank perspective, many
LATAM countries already trade spot over interbank
exchange platforms. Eventually as the markets grow
here there will be room to expand to NDFs, futures
and options. It remains to be seen if this will be done
via an exchange or over the counter.”
One encouraging factor is that most technology
providers seem confident that the communications
infrastructure is sufficiently developed throughout the
major LATAM markets to enable increasingly rapid
development e-trading of forex.

“Regulatory changes or not, clients throughout
the region are beginning to warm up to the idea of
using eFX channels to transact business,” concludes
HSBC’s Debra Lodge. “Tailoring, but not necessarily
personalisation, is the name of the game, we have to
be able to support clients in a way they like to trade
and the way the market moves, this is certainly not a -
one size fits all type exercise.”
The outstanding questions facing electronic FX
trading in the region are very much those facing it
in other regions of the world, including the major
developed centres: what will regulation look like once
the politicians and regulators have put the finishing
touches to it? Secondly, when will new rules be put in
Layer on top of this the history, traditions and
requirements of local economic management and the
LATAM picture is full of hope and opportunity while
cautiously reaching out to the rest of the global FX
electronic trading community. All market participants we
spoke to were full of optimism for the promise that the
region offers for e-trading both for them and their clients.

Regional e-FX perspective on South East Asia

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South East Asia’s increasing economic prosperity is driving growth in the region’s foreign exchange trading activity and, as Richard Willsher discovers, the regions electronic FX trading capabilities have accelerated even faster.

E-Forex Regional Perspective SE Asia

View the text version of this client publication

Regional e-FX perspective on South East Asia
Richard Willsher

The South East Asian region’s main geographical
markets include Indonesia, Malaysia, The
Philippines, Singapore, South Korea, Thailand
and Vietnam. Australia, China, India and Japan are
all influential in the regions markets but separate.
Statistics from the Bank of International Settlements
Triennial Central Bank Survey: Report on global
foreign exchange market activity in 2010 show that
Singapore remains the principal regional hub. Its share
of daily global forex market turnover remains at 5%
as compared with the previous survey but volume has
increased from US$242 billion to US$266 billion.
Also significant is the comparable figure for Hong
Kong, which has grown from US$181 billion in
2007 to US$238 billion in 2010. If counted together,
Singapore and Hong Kong would account for 10% of
daily turnover amounting to the third largest foreign
exchange market behind the UK and the USA. This
indicates how important Asia has become in the FX

Increased turnover in both centres has been aided by
the move to electronic trading. “We have seen growth
of anywhere between 20% and 40% year-on-year in the
amount of foreign exchange business that is conducted
via the electronic channels,” estimates Shankar Hari,
regional head of FX - Asia ex Japan at JP Morgan.
“Specifically in the bank space rather than among the
corporates, as banks and financial institutions face fewer
restrictions than corporates,” he says.
“South East Asia has seen a tremendous growth in
e-trading over the past few years,” says Jamie Salamon
Head of FICC eCommerce APAC at Royal Bank of
Scotland, “and this is down to a variety of reasons.
First, there is much more acceptance of e-trading
FX as a beneficial way of conducting business that
is also complementary to traditional telephone
business. Second, there is more pricing and functional
sophistication available via single bank and multibank
portals that will cater for the many needs of clients.
And third, as more money comes into Asia, FX has
become a much more attractive asset class to investors
as some clients move away from other investment
These trends have accelerated over the last ten years,
explains Phillip Futures’ head of foreign exchange
Joseph Ng in Singapore, as US and European financial
institutions have either set up or expanded their
operations in the region. “The landscape has become
very competitive and resources have been invested in
awareness and education. Clients now have choices from single bank platforms to multiple bank pricing
via electronic communications networks (ECNs) and
multi asset class platforms to suit different needs.”
“With e-trading becoming the norm,” adds Ng, “and
with the presence of stronger competition, prices have
also narrowed tremendously.”
Competition and price discovery
As an indication of the power of electronic trading
to introduce competition and accommodate best
pricing, the compression in bid-offer spreads has been
dramatic, to as tight as three basis points for major
currency pairs. But growth in the use of electronic
trading channels on both the buy and sell sides still
has some way to go.
Mathew Kuppe is Managing Director at, Singapore
based, 360T Asia Pacific Pte. Ltd., the multi-bank
trading platform provider. 360T has 110 market
maker customers worldwide who are the major global
and regional banks that provide and price liquidity
through the firm’s platform. Kuppe explains that 360T
has been in Singapore for five years and has doubled
its turnover every year. He anticipates 80% growth in
On the buy side the attractions for corporate
treasurers, asset managers, hedge funds, second
and third tier banks and broker dealers is easy to
appreciate. “They can access liquidity from a single
source on our platform, with a single straight through
processing (STP) with full transparency,” says Kuppe.
“Traditionally a corporate treasurer picked up the phone
to three different banks, selected the best price, wrote
the deal and then followed up with internal admin for
their in-house treasury management system. Now they
can check all the pricings of our panel banks, execute
the deal, enter it in the treasury management system
and complete the audit trail – all in ten seconds.”
Single bank offerings
The major banking and securities houses may feed
into multibank platforms such as 360T’s while at
the same time offering their own. Saurabh Sharma,
vice president FX electronic market sales at Nomura
says, “Our proprietary platform, Nomura Live, is
increasingly gaining traction in the region. Our focus
is on offering a bespoke solution to clients, be it
developing an algorithmic toolkit or a currency basket
to suit their specific needs.”
JP Morgan’s Morgan Direct platform is similar but
incorporates a hybrid approach to price quotation,
accessing the firm’s in-house prices as well as those
from the wider market. At RBS Jamie Salamon says
that their platform, RBSM, provides clients with a
variety of advanced tools should they want to trade
using a Volume Weighted Average Price (VWAP)
or clients may want to use their new ‘RBS Agile™’
platform to specify automated strategies for their
gamma hedging requirements. He adds that the buyside
is increasingly making use of algorithms.
Other major players offering similar platforms and
services include HSBC and Citi among others.
Meanwhile Standard Chartered, which reportedly
has over 150 staff on the forex sales and trading
side throughout South East Asia, now processes 80
per cent of its deal flow in the region electronically.
Moreover it continues to offer innovative crosses
involving more exotic Asian currencies.
Freedom from regulation
Speaking to market practitioners in the region it
doesn’t take long before they mention Asian currency
of crisis 1997 – 1998. It may be a long time ago
but the scars run deep. Things are different now.
Economies in the region have amassed large foreign
currency reserves as well as substantial sovereign wealth funds. These enable countries like Singapore,
Malaysia, Indonesia and South Korea to both manage
their currencies if, as earlier this year, they feel they
have become overvalued and also to invest in foreign
assets to protect their value against local market
downturns. Nonetheless fear of capital flows causing
economic stress do persist in a subliminal way.
The best example of how currencies are managed is
the Singapore Dollar. The Monetary Authority of
Singapore (MAS) explains the position very clearly,
“The objective of Singapore’s exchange rate policy has
always been to promote sustained and non-inflationary
growth for the Singapore economy. MAS manages
the Singapore dollar against a basket of currencies of
Singapore’s main trading partners and competitors. The
trade-weighted exchange rate is allowed to fluctuate
within a policy band, and where necessary, MAS
conducts direct interventions in the foreign exchange
market to maintain the exchange rate within this
band. The exchange rate policy path and the band are
regularly reviewed to ensure that they remain consistent
with underlying economic conditions. Information
pertaining to the policy band, composition of the
currency basket, weighting system, or money market
operations are not disclosed to the public.”
Singapore as well the other major economies in the
region each manage their currencies and reserves
very carefully. Informal regulation is to a significant
degree, a fact of life. Meanwhile in Europe and North
America no discussion of the future capabilities of
financial markets is free of the “R” word, yet it is early
days as far as South East Asia is concerned when it
comes to OTC forex products.
“People are looking to see what happens in Europe
and North America,” says JP Morgan’s Shanker Hari.
“Nobody wants to impose restrictions just for the
heck of it. Moreover from here when we look west at
what they do, we see that many of the problems that
the world finds itself with were not made in South
East Asia but in Europe and the US. People will wait and watch. No one here wants to rush into regulatory
reforms before examining them carefully.”
Achieving SEF and OTC status
“With APAC playing an increasingly influential role
in the global financial markets [regulation] is a hot
topic,” says Jamie Salamon. “We are already seeing
clearing of non deliverable forward (NDF) products,
foreign exchange options (FXO) are moving towards
central clearing and trading is being focused on swap
execution facilities (SEF) or organised trading facilities
(OTF). We will start to see the current platforms
increasingly gearing up their e-trading capabilities to
meet the regulatory requirements and get SEF/OTF
status. We will also likely see more requirements for
post-trade transactional reporting”
However Joseph Ng at Philip Futures highlighted
that, “From US to Asia, regulatory bodies around
the world are looking to bring more transparency
and accountability into the derivatives market, which
will certainly have a major impact on the overall
FX market. Controls and transparency are well and
good if they can be implemented reasonably without
disrupting business flow. This will create high barriers
to entry for investors, and possibly curb the growth
of the industry, making the market place niche and
opening it to only the big boys, high net worth and
sophisticated traders. It is also foreseeable that market
participants will move to set up business in countries
not affected by such reforms.”
Forex clearing
In October of this year Singapore Exchange (SGX)
launched a clearing service for FX non-deliverable
forwards in Asian currencies. The eligible currencies
are Chinese Renminbi (CNY), Indonesia Rupiah
(IDR) Indian Rupee (INR), Korean Won (KRW),
Malaysian Ringgit (MYR), Philippine Peso (PHP) and
Taiwan New Dollar (TWD).
Regulatory pressure in due course may lead to higher
volumes and additional products such as client
clearing. In addition if it emerges in due course that
FX options fall within new regulatory parameters
SGX advises that this may be added to the range of
products and facilities that it offers. Readers can find
further details of the SGX clearing facility in the leader
article of this issue of e-Forex.
Meanwhile several established global exchanges have
launched new currency futures products over the past
several years and Singapore is no exception Singapore
Mercantile Exchange has launched EUR/USD Futures
and CME has launched some Asia currencies futures.
FX prime brokerage
One of the currently growing business streams of the
global banking groups and larger local players in the
region is prime brokerage (PB). However while it may
assist clients and capture business flow for providers,
prime brokerage brings with it concerns which the
current crisis in the Eurozone and the inexorable
tightening in the interbank market are not helping.
“South East Asia is a highly fragmented market with
many countries and different regulatory frameworks.
Regulations in a lot of countries, unlike Europe,
do not permit financial institutions to participate
in the FX market,” says Nomura’s Saurabh Sharma.
“Therefore we expect demand for FX prime broking
as well as cross asset PB services to continue to grow
as more hedge funds and high frequency players look
to provide liquidity to institutions in the region but
would have very limited access without a PB.”

But the PB space is by no means a cakewalk. “It’s
hugely competitive,” says RBS’ Salamon. “We have
seen a number of the smaller banks in the region
move to become providers of FXPB services over the
last couple of years. This trend could increase due to
clients’ desire to source more competitive pricing and
a larger pool of liquidity. For certain types of clients
this can only be accessed through a PB relationship.
Additionally the requirement to centrally clear NDFs
could lead to more PB relationships in the region.”
All good news then but what about risk? “There
has been increasing interest in taking up FXPB to
minimise counterparty risk and to add convenience
to dealing with a single counterparty while at the
same time enjoying the liquidity of several liquidity
providers. The smaller FCMs use FXPBs to maximise
their funds and to increase mid-office operational
efficiency,” says Joseph Ng at Philip Futures. “We
observed that regional financial institutions offering
FX services are also deploying PB services to overcome
credit and counterparty issues. However, looking at
the cases of Lehman Brothers and MF Global, this
increasing reliance on a single clearing party seems to
amplify rather than reduce inherent risk.”
The risk angle is further focused by RBS’ Chia
Woon Khien, Head of Emerging Markets Research,
Emerging Asia. “Prime brokerage can be quite
capital intensive for providers of these services. At
the moment a lot of banks are carefully managing
their capital in the light of what’s going on in Europe
and capital constraints. When you provide prime
brokerage you take on risk and right now everyone
is worrying about taking on everybody else’s risk.”
The message is clearly that if there is a squeeze on
interbank credit lines or worries about hedge fund
risk for example, expanding prime brokerage services
might have to take a back seat, at least until calm and
trust are restored to the markets.
Retail FX
Meanwhile the growth of FX trading services to retail
traders and investors is expanding throughout the
region. Firstly, there are those individuals who trade
FX as an asset class, perhaps as a hobby or to make a living and who deal with the providers of leverage.
Hantec, OCBC Securities PTY Ltd, GK Goh and
Saxo Bank are among such providers. Larger, global
banks, such as JP Morgan and platform providers
such as FXall in turn supply liquidity to these players.
A second group is comprised of the private banks
and the wealth management operations of local and
international banks that have greatly increased the
amount of FX they transact on behalf of their clients.
There is a considerable volume of wealth being
invested both by family offices and by private banks.
“Retail FX trading has gained traction in South East
Asia over the last 10 years, being marketed by many
overseas brokers over the internet as an easy alternative
to equities trading,” according to Joseph Ng at Philip
Futures. Nonetheless, Singapore is presently the only
S.E Asia country with an approved regulatory structure
for financial institutions to offer leverage FX trading.
Many traders who start FX trading seek brokers who
are able to provide stable platforms, with competitive
prices. The desire for additional features such as charts,
news and advanced trading features are common
requests from more active traders. On the other hand,
more sophisticated FX traders who are looking to
trade with larger fund sizes would pay more attention
to a broker’s financial standing and the regulatory
regime that the broker operates under.
Financial institutions like Phillip Futures, which
operate from Singapore, are popular with this segment
of clients. “Singapore regulators has established a strict
set of conditions governing brokers’ activities and rules
administering the handling of clients’ funds,” he adds.
In addition although forex as an asset class in its
own right does not figure in the latest Cap Gemini
– Merrill Lynch “World Wealth Report”, what is
clear is that Asian high net worth individuals in
the region are investing a significant proportion of
their wealth – of the order of 50% - outside their
home territory, for example in the US. They are also
becoming increasingly diversified into asset classes
such as property and other alternatives. To do so
they inevitably have to come to the foreign exchange
market in order to purchase assets denominated in
currencies other than their own.

“With South East Asian economies expanding at a
rapid pace, countries like Indonesia have a growing
population of wealthy people,” says Nomura’s
Sharma. “Many of these have FX needs arising out
of investments abroad and a greater appetite to
participate in the retail foreign exchange market. It
has increasingly become clear to banks that catering to
a diverse set of clients and achieving scale via a good
electronic offering is paramount.”
Key importance of technology
“FX is as much about technology today as it is about
financial markets,” continues Sharma. “Most serious
players in the FX space are investing in technology to
reduce latency, and have their data centres in optimal
locations in order to eke out value from the business.
Algorithmic execution is slowly starting to pick up
in the region. Clients are not only looking for best
execution but also post trade analysis to best gauge the
impact of their trades on the market and also reduce
costs related to and around execution.”
Thomson Reuters is one leading FX provider which
has been steadily expanding its offerings in the region,
“As banks have further embraced technology from
a liquidity perspective we have developed a strong
community of users in this region, especially where
local currencies are allowed to be listed on Thomson Reuters Matching and Dealing,” says Anthony
Northam, the head of Asia for Thomson Reuters
Marketplaces group. “Some of the major regional
banks are adopting Reuters Electronic Trading (RET)
for in- house process management, they are using it
as a pricing engine and to automate their branches
for spot and swaps currency exchange. Whereas
before, currency exchange would have been done
mainly by phone, the benefits to them of automation
are straight-through processing and better risk
management. In addition, banks are now starting to
use RET as a pricing engine to push prices out to their
Another leading FX provider whose business has
been growing strongly in the region is New York
based FXall. Their multibank portal is now used
by many locals as well as international players in
South East Asia. “It is all about workflow,” says
Jonathan Woodward head of Asia-Pacific, “reducing
risk for the buy side, ensuring compliance with
various international accounting standards and
future-proofing them for the changing regulatory
Future growth
Looking ahead, FX markets in South East Asia look
well placed to prosper but where specifically is growth
going to be felt. We asked market participants for their
views. “I think there’s going to be a generic shift to the
Asian region,” FXall’s Woodward adds, “as everybody
looks to Asia as the saviour of the world economy - the
engine of growth. We will see a shift in asset allocation
strategies as funds search for alpha generating
investments and a lot of hedge funds have started to
spring up in Singapore and Hong Kong. You may pick
up investment capital from some of the local sovereign
wealth funds and escape, for the moment, some of the
regulatory moves that are taking place elsewhere. Prop
traders from banks who have been impacted by the
Volcker Rule and lost their jobs are thinking of setting
up funds here; there’s been a big growth in this area.”
Woodward says that FXall has seen 150% annual
growth in the NDF business traded on its platform.
He sees this continuing at a similar pace for the next
three to five years. He notes however that people tend
to overestimate the amount of change that may take
place in a two-year period but underestimate the change
in a ten-year one. He believes that over the longer term
NDF business could disappear in large measure as
restricted currencies become freely tradeable. JP Morgan’s Shankar Hari sees the greatest growth
potential in South East Asia as residing in the
countries outside Singapore. “Most Singaporean
clients have already been mined,” he says. “But in
other markets such as Philippines or Indonesia or
Malaysia there is greater scope for growth. As local
regulations become more relaxed it will also lead to
higher liquidity in their FX markets.”
“Japan remains the largest retail margin trading centre
in APAC despite the de-leveraging regulations brought
in over the last couple of years,” explains Jamie
Salamon at RBS. “However there is a definite trend for
growth outside of Japan and this is centred mainly in
Hong Kong, although pockets of substantial retail FX
business also exist in South East Asia.” He anticipates
continued growth in the retail space.
Other influences
Regulation is likely to remain a significant influence
for the foreseeable future. The credit risk challenges
currently confronting FX options business lead many
to believe that it will be necessary for there to be
clearing houses located in each time zone to cover each
FX derivative product, whether NDFs, options and
perhaps futures.
Consequently as co-president of the SGX exchange
Muthukrishnan Ramaswami surveys the future he
sees it as holding great prospects for his business and
for Singapore as a regional hub. “We want to be the
clearing centre of choice in Asia,” says Ramaswami.
“OTC transactions by nature are borderless but there
will also be instruments that are principally domestic
and participants may want those to be cleared locally.
We will have to wait for the regulations to emerge. We
currently list on SGX over 95% of the bonds listed
in Asia that are issued cross border. But not domestic
issues of which there are a great many. With other
products it will be the same way. We see that the risk
management will have to happen in each time zone
where the risk happens. Therefore, broadly speaking
there will be the need for a clearing centre in each of
the three time zones.”
His message, like those of others in the vibrant South
East Asian market, is that this is a region where FX
is a rapidly growing, technology facilitated business.
This is where there is going to be a lot happening as
continued strong economic fundamentals power the
development of new FX products and capabilities over
the coming years.

Regional Perspective on Africa

Filed in: banks, trade, foreign exchange, forex, africa, fx, e-forex, trading, rand

Richard Willsher discovers how trade and telecommunications infrastructure shape the current foreign exchange market in Africa as a whole and although South Africa is the continent’s leading electronic trading market, he outlines why we can expect to see growth in e-FX taking place in many other countries within the continent over the next few years.

E-Forex Regional Perspective Africa

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Version:1.0 StartHTML:0000000105 EndHTML:0000004885 StartFragment:0000002784 EndFragment:0000004849

Richard Willsher discovers how trade and

telecommunications infrastructure shape the

current foreign exchange market in Africa

as a whole and although South Africa is the

continent’s leading electronic trading market,

he outlines why we can expect to see growth in

e-FX taking place in many other countries within

the continent over the next few years.

A glance at the most recent Bank for
International Settlements’ Triennial Central
Bank Survey published at the end of December
2010 reveals the foreign exchange market activity
on the African continent pales beside other regions.
Africa and the Middle East together accounted for
daily turnover of US$41 billion in all products in
April 2010. Th is was out of a global total of US$3,981
billion of which the two largest regions were
Western Europe’s totalled US$2,780 and Asia Pacifi c
US$1,159. South Africa was the only African country
listed individually by country breakdown in the BIS Survey and its daily
turnover amounted
to US$14 billion out
of the US$41 billion
mentioned above.
Growth opportunity
One might be forgiven
for imagining the
world’s second largest
land mass is something
of a backwater in
foreign exchange
terms but this would be to miss the point because it
represents an outstanding growth opportunity.
“Apart from South Africa, which can be considered
relatively advanced in its exposure to e-channels, the
remainder of Africa is relatively untouched,” explains
Declan Clements Director, eCommerce Business
Management Financial Markets at Standard Chartered
Bank. “Poor infrastructure, illiquid markets, regulatory
restrictions, inconsistency of electronic price availability,
relatively small ticket sizes and manual downstream processes represent an array of challenges to sell-side
institutions in delivering a relevant offering,” he adds
but his outlook is a positive one. “As infrastructure
improves, one of the larger barriers will be removed.
At Standard Chartered we see the upside opportunities
as substantial, and are investing heavily in creating
a technical capability that incorporates compliance,
straight through processing (STP) and post-trade
services alongside price discovery and execution.”
Clements says that the main beneficiaries of improved
access to electronic platforms will be corporate and
Institutional clients in the more liquid markets,
such as Kenya, Tanzania, Uganda and Ghana,
“notwithstanding a fluid governance environment that
requires providers to be extremely responsive to the
implementation of new regulations.”
Opening up new markets
Jacob Dajani, Head of Middle East and Africa for
Marketplaces at Thomson Reuters says that trading
and technology infrastructure go hand in hand and
telecommunications infrastructure has been a challenge
in some African countries. “As a consequence we had to
look at alternative methods to deliver Thomson Reuters
Dealing and this has helped to open up new countries
to the wider market. With more than 400 financial
institutions using Dealing this has become the common way of trading FX electronically in Africa from Cairo to
Lagos to Johannesburg, and our community continues
to grow. As markets, liquidity and infrastructure evolves
this creates new opportunities to introduce new services
such as Matching and providing single-bank platforms
such as Reuters Electronic Trading to enable banks to
reach and service their customers via an e-commerce
So the message is clear, there will be great scope for
growth in electronic trading once the infrastructure is adequate to facilitate it. What is happening in
South Africa today is likely to fl ow through to the
broader African region in years to come. Moreover
with commodity prices refl ecting continued global
concerns over the fi nite size of available resources,
increased income to mineral rich exporting territories
to fund imports and infrastructure development is
certainly on the cards.
“We see particular growth in demand and liquidity
from Nigeria and Kenya,” explains Richard de Roos
Head of Foreign Exchange at Standard Bank. “But
deals sizes are small. “In Rand we can deal in clips
of up to US$250m and also stream prices in tens
of millions. For the other African
currencies we also stream prices
into our own system as well as
to aggregators such as 360T
but up to sizes of about
US$3m. Moreover,
sometimes liquidity in
these the markets can
be a little one sided
and so you can only
show prices on one side.
On the buy side, given
the sizes of the equity and
bond markets we tend not to see
demand for clips of more than about US$5m.
When we do see demand we will either work the
deal or quote prices depending on the liquidity at
the time.”
He goes on to say that the smaller markets are
Mauritius, Botswana, Zambia, Uganda but these
are extremely small and Standard Bank concentrates
on order fi lling rather than streaming prices. It
concentrates on Anglophone areas of sub-Saharan
Africa and the Lusophone markets of Angola and
SA leads the continent
South Africa remains the continent’s leading foreign
exchange trading nation centred on Johannesburg.
With a share of turnover in the domestic Rand
between 30% and 35% de Roos believes Standard
Bank is the market leader. However even in this most
advanced of African countries, e-FX is still in relative
infancy when compared with Europe and North
“Even in South Africa with the market infl uenced
by the legacy of exchange control, the market is
dominated by the corporate rather than by the
investor community. Th e investor community here
are not really big players in the foreign exchange
markets. Th ere are no institutions in the SA market or
in the African continent that I know of who are actively
trading in currency as an asset class,” says de Roos.
However this has not prevented banks making
e-trading channels available to all of their customers.
Standard off ers its E-Market Trader, which is widely
used by the corporate market. Th ey also use this to
distribute to banks mainly on the African continent
as well as to their own internal sales offi ces around
the globe. “We have the ability to stream prices in
US$-Rand and its crosses in G10 currencies on
E-Market Trader. We also use this to distribute to the
pockets of liquidity that there are in the other African
currencies. Th is works well where it can
be associated with a strong brand and
is largely therefore on the African
Th e bank also has a product
called Standard FX
Trader, which is a
white label agreement
with Gain Capital and
is used to distribute to
individuals such as day
Rivals Absa Capital are able to
leverage the 55.5% shareholding
held in them by Barclays Bank
PLC in a number of ways, both
in the domestic South African
market and in the continent as
“We run the sub-Sahara Africa currency
book for Absa and for Barclays,” explains
James Scott Absa Capital’s Head of FX Sales and
eCommerce. “We are the price distribution source for
all of the sub-Saharan Africa currencies and also cover
risk management. Johannesburg is our hub and we
leverage the Absa and Barclays branches throughout
Africa to further distribute product. We off er pricing
in the more liquid of these currencies to our South
African client base as well as price those to Barclays
electronic client base. Th is could be to a UK asset
manager looking to do some Kenyan or to a South
African corporate looking to hedge Ugandan. We
publish a price as long as there is liquidity in it.” He
adds however, “In each of the domestic markets you
currently wouldn’t fi nd that there is much demand
from local banks to develop electronic trading at the
moment.” He points out that in many of Africa’s smaller
forex markets some of the international banks have
launched localised versions of their own electronic
platform. However even in South Africa itself getting
electronic trading to take root has not been easy, but
the market is developing quickly.
“Like a lot of developing markets, the infrastructure
in South Africa was really poor. It was very diffi cult to
get electronic capability into the buy-side client. Th e
asset managers and hedge funds were the fi rst to move
and where permissible they would tend to be trading
– G10 against major players off shore. Th en we and
other regional banks off ered our proprietary channel
to clients. We would off er FX, money market and
commodities in some cases. With certain clients we
would off er an API [application programme interface]
with pre- and post-trade services, depending on the
sophistication of the client and their requirements.
We have access to Barclays Capital technology, while
others had to develop their own capabilities or partner
with a global technology fi rm. Even though we had
access to the Barclays technology it is still important
to look at what made sense for the local South African
or African market and then customise our off ering
before rolling it out. In our case we launched PACE
FX powered by BARX and delivered to local buy side clients.We believe that our “Global-Local” approach is
unrivalled in Africa.”
Trade fl ows
A key feature underlying forex transactions in
South Africa, as well in other African markets where
exchange controls apply, is that there typically needs
to be a concrete, not speculative, need for a currency
exchange. A lot of the demand is driven by trade
activity whether it is in commodities or other types of
imports or exports.
“Broadly speaking that is what is driving the foreign
exchange market in all of these African markets,”
says Scott. “It’s less about the speculative fl ow and
more about actual underlying trade fl ows. If you take
that into the electronic space then there is going to
be scope for developing electronic capabilities that
service the types of clients which trade. Further it is
always likely that developing the full trade cycle from
pre-trade to execution and interface with treasury
management and internal reporting systems will
become a requirement. Absa Capital has continually
invested in these services for both its South African as
well as African client base.”

Th is is a view shared by Standard’s Richard de Roos.
His bank is actively developing its end-to-end off ering
across the value chain from research and pre-trade
to execution. Moreover reporting needs to be an
integrated feature of electronic off erings to corporates,
both for their internal needs and in order to meet
Reserve Bank compliance.
Product menu still limited
In terms of available forex products South Africa is
far in advance of any other African country. Spot and
forward trades against the G10 currencies account for
most of the market. Forwards can stretch as far out as
two years but de Roos says that average demand tends
to be around three months driven by large
corporates and investors hedging their
exposure to asset classes denominated in
Dollars or Euros. Th ere is however a healthy
and developing market in more sophisticated
“Th e liquid forward curve in the Rand goes
out to 2 years,” says de Roos. “However because the
bond market goes out to 30 years we are able to create
forwards out that far. Demand for the longer-term
transactions tends to be driven by large infrastructure
projects or large capex spend which would be required
to match the life of a project or purchasing cycle for
example. Th is we would price off of the swap curve.”
In addition the Johannesburg Stock Exchange quotes
currency futures that are also used by institutions
to hedge the currency risk associated with foreign
asset holdings. However for the moment other
products targeted at institutional clients such as prime
brokerage are still in early growth phase.
Prime brokerage
“At present the prime brokerage market is in its
infancy with most of it concentrated in South Africa.
says Th omson Reuters’ Jacob Dajani.
360T’s Alex Johnson who manages the fi rm’s sales in
the region notes that the market is currently somewhat
becalmed. “Hedge funds in places like Mauritius, may
70 | april 2012 e-FOREX april 2012 e-FOREX | 71
certainly demand such services, but like the rest of
the world, demand is down. 360T has features and
functionality to cater all such requirements but banks
and corporates are not normally requesting PB services
as they cost money and these requestors get better
liquidity and pricing by asking on a disclosed basis.”
Absa Capital’s James Scott is more upbeat however.
“We’ve got a multi-asset class PB platform that
includes currency futures at this point. With access to
Barclays Capitals FXPB platform and as the market
develops we will naturally assess demand and develop
accordingly. We will start to see demand from the
more developed markets outside of South Africa such
as Nigeria and Kenya.”
New developments
New developments may however come quicker in other
areas of the forex markets. Jacob Dajani says that he
foresees signifi cant e-FX growth and the proliferation
of eCommerce platforms will continue across the
continent. Th is seems to be echoed by the moves that
Standard Bank is making for example. “I think over the
next 10 years African currencies are going to get a lot
more attention,” says Richard de Roos. “Th e liquidity
and sophistication will then become self fulfi lling. For
Standard Bank it is about having the readiness. We
are proceeding on an “e-wise” basis. We are ready but
recognise that development is likely to be in a bespoke
form. So we are going to be prepared whether the
demand comes from retail investors or corporates alike.”

A view shared by Absa Capital’s Scott, is that it is
the bank’s plan to continually invest into its already
well established electronic product suite. “Africa will
provide a number of opportunities in the electronic
space which we believe we are well equipped to take
advantage of.”
At 360T Alex Johnson believes that commodities will
play a big role. “Given the traditional mining and
minerals focus of many African economies, certain
customers are wanting to transact in precious and
base metals and others in more niche mineral and
energy products. Due to the nature of the electronic
trading of commodities, certain products will fit and
others not. The major players in electronic trading, for
example, will offer precious metals trading.”
“Regulations here are increasingly being loosened and
that is opening the door for retail investors to trade
electronically,” adds James Scott at Absa Capital.
“There are very few electronic offerings either here
[in South Africa] or in the rest of Africa. More retail
electronic platforms will most likely be launched into
these markets probably with partnerships being forged
between local players and international technology
companies. We have seen ECN’s like 360T coming
into some of the African markets. They are looking
to get buy-side clients onto their channels. Multiple
banks are contributing to the pricing, but for the
moment there is relatively low demand. I think the
banks will continue to develop their proprietary
channels and the biggest growth will be in this space.”
Meanwhile Thomson Reuters is widely represented in
markets across Africa where, according to Jacob Dajani
they are working with the key market participants
from central banks, to regional banks and their
customers. “We have worked closely with countries
to help them move from a domestic to international
market. There is great opportunity in the region. We
are actively working to open up access to international
markets by providing the local news, content and
market insight via our Thomson Reuters Eikon
desktop plus the connections and infrastructures that
enable both local and international banks to trade.”
A clear message emerges then when speaking to market
participants. It is that lack of technology infrastructure
and exchange controls on essentially weak and illiquid
currencies remain the principal barriers to forex trading
in general and e-trading in particular in Africa. Yet the
balance of economic power is shifting from the formerly
wealthy west to commodity rich regions, wherever on
the planet they are. Africa remains in catch up mode
as compared with, for example, Latin America, Asia
or some of the former eastern block states and “catchup”
spells “growth prospects” for those who seek
opportunities in emerging markets. Trading in African
currencies offers exceptional scope for growth once they
have passed their growth tipping points. Then they may
leapfrog conventional foreign exchange dealing to e-FX
trading on a continental scale.

OTC FX Clearing Moves to Centre Stage

Filed in: foreign exchange, over the counter, forex, fx, emir, regulation, dodd-frank, otc, clearing, derivatives

Lack of clarity about the extent of mandatory regulation for over the counter foreign exchange (OTCFX) derivatives persists but 2012 should bring greater definition and guidance to those in the market.

E-Forex OTC Clearing

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Lack of clarity about the extent of mandatory
regulation for over the counter foreign exchange
(OTCFX) derivatives persists but 2012 should bring
greater definition and guidance to those in the
market. Meanwhile, Richard Willsher reports on how
exchanges, clearing houses and service providers
are setting their strategies and gearing up their
technology for the opportunities that may emerge.


As it stands we know that non-deliverable
forwards (NDFs) and FX options will be
mandated under the European Markets
Infrastructure Regulation (EMIR) in Europe and the
Dodd-Frank Act in the US. We also know that both
pieces of regulation exclude spot FX and commercial
the [US] Commodity Futures Trading Commission
(CFTC) such as block size and whether block size will
apply to NDFs in general or by currency pair.”
Although CME clears a large range of FX futures and
options, in conjunction with ICAP, CME Clearport
now provides clearing for US Dollar (USD) / Chilean
Peso (CLP) NDFs. The model is a central clearing
counterparty (CCP) one where CME Clearport
becomes the guarantor to every buyer and seller of
the product. It is an early offering that will lead to “a
full suite of cleared OTCFX products,” CME reports.
They anticipate offering 11 NDFs and 26 cash-settled
futures (CSFs) in due course.
This example represents a pre-emptive strike by
a major exchange for a share of the increasingly
demanded forward market in restricted emerging
markets currencies. It is geared to meet what is
thought likely to be required under Dodd-Frank. It
provides a secure platform for financial institutions
that require hedging for their corporate clients or
proprietary trading capability for their own account.
forward transactions. Beyond that a regulatory fog
“Clearing of OTCFX continues to be an evolving
topic with more questions than answers at this point,”
according to Chip Lowry, Chief Operating Officer
at New York headquartered FX platform Currenex.
“Certainly, Dodd-Frank mandates the clearing of
NDFs and FX options however the timing of this
requirement is still being determined. Globally, some
clearing houses already offer clearing services for
NDFs but take-up has been slow.”
“The US appears to be the first jurisdiction that will
mandate clearing of NDFs; however the industry is
still waiting for solutions to appear,” continues Lowry.
“Several important rules are awaiting finalisation from
Noteworthy is the choice of a Latin American
(LATAM) currency where the time zone is the same
or similar to that of the US financial markets. The
Chilean Peso is supported by a growing and resource
rich economy and the general trend in USD/CLP
rates has been relatively stable in comparison to more
exotic or dramatically fluctuating currencies in the
LATAM region. These key features are already being
replicated for other emerging market NDF currencies
in another time zone, i.e. South East Asia.
On 24th October this year Singapore Exchange (SGX)
launched a clearing service for FX non-deliverable
forwards in Asian currencies. Settling in US Dollars
and with a maximum residual term from date of
submission of 375 days, the currencies eligible for
clearing are Chinese Renminbi (CNY), Indonesia
Rupiah (IDR) Indian Rupee (INR), Korean Won
(KRW), Malaysian Ringgit (MYR), Philippine Peso
(PHP) and Taiwan New Dollar (TWD).
As Asia’s only CCP facility for a variety of derivatives,
the clearing members eligible to take part in clearing
include: Barclays Bank PLC, Citibank N.A., Credit
Suisse AG, DBS Bank Limited, Deutsche Bank
AG, HSBC, Oversea-Chinese Banking Corporation
Limited, RBS, Standard Chartered Bank, United
Overseas Bank Limited and UBS. As yet it is early
days for this new on-exchange clearing activity
and volumes have so far been relatively modest
as compared with longer established SGX listed
products, however, research carried out by the
exchange ensures that the facility is demand led.
“We have chosen to clear trades that are between
professional clearing members,” explains SGX copresident
Muthukrishnan Ramaswami. “There have
been pretty high bi-lateral risks that they are taking
today. This way is more capital efficient for them as
taking risk on a CCP carries a lower capital rating
than bilateral risk, especially when Basle III comes
into force.”
In due course Ramaswami expects SGX will extend
this model to clearing client trades, and, in due course,
probably FX options – of which more later. The
introduction of clearing for NDFs posed a variety of
challenges on the technical side which SGX dealt with
in a pragmatic and system-agnostic manner.
“We are not setting the agenda on what needs to be cleared,” Ramaswami continues. “What needs to be
cleared is determined by the capital requirements
for each instrument and therefore what each of our
participants wants to do for their various asset classes.
It is different from an exchange led process. It is what
our members want to clear. We are a need fulfiller in
this context. As an exchange we work with probably
30 different order management systems in our futures
and securities context but we work with them using a
FIX protocol or a specific [application programming
interface] API. The providers will usually be able to
work with one of those. So it’s about standardising the
interfaces rather than standardising the registration
mechanisms. Moreover these providers also want to
connect to many clearing houses. They want to be able
to service their clients in multiple jurisdictions. So this
is a two-way industry need between the registration
systems and the clearing houses. The OTC execution
remains as is. Putting it into a clearing house brings the
rigour of margining and rigour of having collateral to
support your positions. And having that held in a ring
fenced manner in a clearing house and away from any
risk you may run from having it with a broker or bank.”

Challenges and risks
Significantly however, while SGX has an eye towards
EMIR and Dodd-Frank, no mandatory regulation is
yet on the horizon in Singapore. This brings with it
with the risk, or the opportunity, depending how you
look at it, for regulatory arbitrage. This is an evolving
story and it remains to be seen whether OTCFX
clearing becomes a global phenomenon.
“The global nature of the FX market means that
clearing infrastructure and processes need to be as
harmonised as possible across the world’s financial
centres. Regulatory harmonisation will be key to
enabling participants to trade quickly and efficiently
with their global counterparts, whilst avoiding the
negative consequences of regulatory arbitrage.” says
Wayne Pestone, Chief Regulatory Officer, at FXall.
However, where relatively rarely traded and
unstandardised NDF currency pairs are traded in local
emerging markets, less tightly regulated regimes will
most likely still apply.
Meanwhile vendors providing trading platforms for
institutional, global clients have some challenges to
overcome. “The biggest challenge we are going to have
[in the new regulatory environment] is configuring a
multi drop copy capability and sending it to enough
people who are interested in that trade,” says Jonathan
Woodward head of Asia-Pacific at FXall. “For example,”
he says, “if you had some American money domiciled
in Hong Kong but then traded with a Singaporean
bank and cleared with SGX you are going to need to
report that to authorities in the US, Singapore and
Hong Kong. So, instead of just giving the client some
straight through processing you have to think, “where
else do they want us to drop this information so that
they comply with any future regulations?”
What quickly becomes clear from this is that
multibank portals or electronic communications
networks (ECNs) that have global capabilities to
connect with CCPs, clients and regulatory authorities
wherever they are based, have a pivotal role to play.
Which is not to say that single bank platforms do not,
because they may provide additional, more specialised
and less standardised services to their clients. However
interoperability is vital. No portal can afford to be
an island or its clients will quickly migrate to where
communications to all relevant parties to its activities
are easiest, most efficient and lowest cost.
So, for example, at Nomura, Mark Croxon who is
executive director, prime services and global product
manager for OTC clearing, says the objective is, “to
build a clearing house agnostic service across products,
asset classes and regions. That does present some
challenges in terms of ensuring the connectivity to
each of those clearing houses and venues. There are
challenges with getting the plumbing set up, although
there are a number of vendors who can help with this.
You may also have a connectivity unit internally that is
there to set up and maintain some of the connections.”
Minimising systemic risk remains at the core of
the various efforts to develop OTC clearing. “The
intention of the legislation is to reduce systemic
risk by making OTC markets and counterparty
risk management more transparent. Specifically
around risk management, it is about having the
collateralisation and default management processes
prescribed and the margins and default fund
contributions relating to those positions being posted
and being held up front at the central clearing house.
Furthermore rules in the US, and incentives from
a regulatory capital perspective under Basel III, are
leading to segregation of those funds risk and the
exposure to significant institutions defaulting,” says Croxon.

FX options
While regulatory guidance on the requirements for
NDF clearing have been relatively straightforward
there is still missing detail as regards FX options.
“While NDFs are relatively simple instruments
to clear in theory, FX options pose some logistical
issues that still need to be sorted,” says Chip Lowry
of Currenex. “One issue is around auto-execution at
expiry. In the listed world, auto-exercise is handled by
the clearing house and is a standard process. Because
OTCFX options are not standardised instruments,
the question of who decides execution remains open.
There is an ongoing dialogue between end users of
these contracts and clearinghouses about this issue.”
“The other issue to be tackled,” he adds, “is
guaranteed settlement. Industry authorities such
as The Committee on Payment and Settlement
Systems (CPSS) and the Technical Committee of the
International Organization of Securities Commissions
(IOSCO) have proposed that clearing houses
guarantee the actual FX settlement of an exercised
option. As the amounts involved can be quite large,
clearing houses are not yet comfortable with this
concept. This issue is fundamental to OTCFX options. Without agreement on this topic, I doubt
we’ll see FX options cleared in the near-term.”
“Whilst a general framework [for which products
will be eligible for clearing] has been provided by the
Dodd-Frank Act in the US and EMIR and Mifid II in
Europe, there has been no decision on the final rules.
The challenge for industry participants is to make
preparations that are as future-compliant as possible.”
says Pestone, “The industry knows that change is
coming but is in need of clarity around what, exactly,
these changes will be, and when and how they will be
implemented. As such, it is important to prepare for
every eventuality.”
For the time being it is expected that the rules under
both EMIR and Dodd-Frank will be in place during
2012. Institutions required to comply still lack the
clarity to build the required systems. The timeline,
which began with post-2008 crisis G20 talks looks like
extending some distance yet and it seems likely that
compliance will not become mandatory until 2013.
Market participants are in general sanguine about the prospects for their businesses and are taking what
steps they can to ensure that they will be ready to offer
compliant services to support their clients’ needs. The
greatest fear is that regulations will either mismatch
across various jurisdictions - Europe, the US, the
major financial centres of the Far East - and that they
will be implemented at differing times. Both of these
could cause competitors to avoid regulatory constraints
perhaps by relocating their operations to unregulated
centres. In the end however, as with so much of the
post-crisis regulation that has emerged from Brussels and
from the US, there is a certain inevitability surrounding
global compliance. The FX market will probably have
no choice about whether or not to comply with OTCFX
regulations eventually. Going forward the game is about
minimising the effects and costs of regulation through
the lobbying efforts of bodies such as AFME, SIFMA,
ASIFMA and others and then ensuring that full clearing
and transparency requirements will be met when the
regulations take effect.

MiFID II, EMIR and Dodd-Frank - where are we now?

For the first time the Markets in Financial Instrument
Directive (MiFID) will cover market trading of
OTC derivatives. London-based law firm Linklaters
advise, “All trading in derivatives which are eligible
for clearing and sufficiently liquid will be required to
move to either:
• Regulated markets;
• Multilateral trading facilities (MTF); or
• A specific sub-regime of organised trading
facilities, which must fulfil (as well as general
requirements for organised trading facilities,) the
following criteria:
o - Provide non-discriminatory multilateral access
to its facility;
o - Support the application of pre and post-trade
o - Report transaction data to trade repositories;
o - Have dedicated systems or facilities in place for
the execution of trades.”
Pre- and post-trade transparency requirements will
relate to all derivatives trades wherever they are
MiFID II proposals were published by the European
Commission on 20th October 2011. Consultants
Deloitte say, “Given the timeframes set out, it does
not seem likely that the G20 deadline for the trading
of standardised derivatives on electronic platforms by
the end of 2012 will be met.”
The UK Financial Services Authority (FSA) advises
that European Markets Infrastructure Regulation
(EMIR) “follows, and facilitates within the EU, the
commitment made by G-20 leaders in Pittsburgh,
September 2009, that:
“All standardised OTC derivative contracts should be
traded on exchanges or electronic trading platforms,
where appropriate, and cleared through central
counterparties by end-2012 at the latest. OTC
derivative contracts should be reported to trade
repositories. Non-centrally cleared contracts should
be subject to higher capital requirements. We ask
the Financial Stability Board (FSB) and its relevant
members to assess regularly implementation and
whether it is sufficient to improve transparency in
the derivatives markets, mitigate systemic risk, and
protect against market abuse.”
The European Parliament finalised its input in July
of this year. Currently EMIR is being fine tuned
in a “trialogue” process involving the European
Parliament, the Economic and Financial Affairs
Council (ECOFIN) and the European Commission.
It is expected that this will be concluded in the first
quarter of 2012.
“The [Dodd Frank] Wall Street Reform [and
Consumer Protection] bill will – for the first time
– bring comprehensive regulation to the swaps
marketplace. Swap dealers will be subject to robust
oversight. Standardised derivatives will be required to
trade on open platforms and be submitted for clearing
to central counterparties. The Commission looks
forward to implementing the Dodd-Frank bill to lower
risk, promote transparency and protect the American
public”, Gary Gensler, chairman of Commodity
Futures Trading Commission (CFTC).
While CFTC has finalised certain parts of Dodd-
Frank it is not expected to have defined the precise
rules for FX derivatives until the first quarter of 2012.