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76 | january 2014 e-FOREX january 2014 e-FOREX | 77

The preliminary results of the 2013 BIS Triennial Central Bank Survey of turnover in foreign exchange markets published in September show that daily volume in April last year in the three principal Asian centres of Hong Kong, Singapore and Tokyo amounted to USD1,032 bn per day. This was up more than a quarter on the same measure three years earlier. Together they account for 15.4% of global daily turnover, marginally less than the 16.2% in 2010 but the total was larger. Moreover the BIS findings are regarded as conservative by market commentators who say that they do not fully take account of internal netting by banks and broker dealers. The actual figure could be significantly higher.

Furthermore these BIS numbers take into account spot transactions, outright forwards, currency swaps and FX options but not futures. The change in the make up of instruments traded, and we look at this later, is showing a significant shift. For example CME, which offers 61 futures contracts and 31 options out of its Singapore exchange says that its turnover in Asia has risen by 30% in Asia over the last year, albeit from a low base. Change in Asia’s FX market is happening rapidly and nowhere more so than in Singapore.

SingaporeThe Monetary Authority of Singapore has been quick to seize on the BIS triennial statistics as

proof of Singapore’s emergence as the region’s leading FX hub. “Our growing strength in foreign exchange is a key complement to the development of capital market and asset management activities,” stated Jacqueline Loh, deputy managing director at the Monetary Authority of Singapore. “It will also better position our financial center to serve the investment and risk management needs of financial institutions and corporates throughout Asia.”

Singapore overtook Tokyo in April 2013 as the transacting 5.7% of daily global turnover worth USD383 bn versus the Japanese capital’s corresponding 5.6% and USD374 billion. But, as Ms. Loh highlights, the overall numbers are only one measure of Singapore’s growth.

“Growth is the result of a combination of several factors,” agrees Aiyana Currie, UBS’s Singapore-based executive director and head of FX e-commerce sales for Asia Pacific. “Singapore has become the Asia sell-side hub for trading FX, with firms moving offices from home locations in Australia, Japan, and Hong Kong as well as from smaller centres to centralise trading operations in Singapore. Further momentum has come from an expansion in the alpha-generating community trading FX from Asia as a whole, with many players coming to Singapore. At the same time, locally-based hedge funds as well as institutional and Regional e-FX

perspective on

Dodd Frank, RMB and Mrs. Watanabe: Richard Willshire reveals how all signs point to a great leap forward for e-trading in Asia’s foreign exchange market, where regulation, trade in renminbi and the Japanese retail sector are the outstanding features in the landscape.

By Richard Willsher

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Market 2010 volume

2010 global %

2013 volume

2013 global %

Hong Kong SAR

238 4.7 275 4.1

Japan 312 6.2 374 5.6

Singapore 266 5.3 383 5.7

Total 816 16.2 1,032 15.4

Courtesy of Bank of International Settlements: Triennial Central Bank Survey 2013. Net-gross basis, daily averages in April, in billions of USD and percentages

AsiA

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78 | january 2014 e-FOREX

corporate investors are opening Asia-based offices in Singapore. Over the last few years, there has also been a trend for former night-desks in the US to relocate to trade Asia in an Asian time zone.”

Interestingly, one of those night desk shifts has been the Swiss central bank that has chosen Singapore as its Far Eastern location from which to assist its exchange rate control policy.

“MAS and the Singapore Government is very focused on creating employment and the result is a great environment for firms to be located,” enthuses Chris Knight, head of e-trading (East), FXRC at Standard Chartered Bank. “Singapore has a rapidly growing wealth management sector being serviced locally. Regional banks are getting stronger and winning more market share as they do not have to deal with some of the balance sheet constraints of the western banks.”

Javier Paz, senior Analyst at research and advisory group Aite adds, “What makes Singapore unique is its location. It is effectively positioning itself as the Geneva of Asia where a lot of wealth is stored. It has great links with London and Luxembourg and it has prudent regulation to support that. Overall it inspires confidence of many nations in the region who feel comfortable with doing business there. There is significant exchange activity and the infrastructure, there is no doubt that it has become one of the primary hubs for its region.”

TokyoAlthough Singapore’s growth as an FX trading centre is impressive, Tokyo’s role in the region should not be understated.

In terms of infrastructure, Tokyo is Asia’s main connectivity centre. Its powerful TY3 data centre is used by 13 of the leading global banks and

more than a dozen high frequency traders are located there, as is EBS’ matching engine. It is the place to be for ultra low latency and it is a single hop, in terms of data transmission, from there to either London or New York. Furthermore, while the recent jump in growth of retail trading volumes in Tokyo has been phenomenal (see panel), Japanese economic policy dubbed “Abenomics” has also stimulated activity across the financial markets in a major way, including FX. Jonathan Woodward, head of Asia Pacific at Thomson Reuters owned FXall points out that trading by the major Japanese funds and banks is highly electronic and it may not be as inaccessible as some in the market suggest. “Japan has a USD5 tr pension market,” he says. “About 50 fund managers there have been trading electronically for about the last 10 years. Many of these fund managers are now using FXall solutions. And some of the global players are using FXall to trade in Japan and other Asian centres as well.”

Buy Side demandWhile buy-side demand for FX services was, in the past, driven by import / export business and transacted OTC, often by voice, the market has moved on considerably in the last decade. Since then trading has shifted to e-platforms.

“It could be argued that the independent brokers and ECNs were key in developing the sector, with constantly evolving platforms and online services, highly competitive pricing and access to a wide range of products,” says Mark Hanney, CEO at Valbury Capital, the London based broker with strong links to Asian clients. “This functionality has increasingly impacted on the corporate

Regional e-FX perspective on Asia

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market – perhaps in a not dissimilar way to the iPhone impacting on Blackberry’s business email dominance. Competition amongst ECNs and single dealer platforms has shifted liquidity into more exotic pairs in search of alpha making opportunities. At the same time these platforms are now starting to offer aggregated feeds for not only spot, but forwards, NDFs, options and swaps.”

At UBS, Aiyana Currie stresses the importance of segmenting clients. “While each client is unique, buy-side players tend to fall into three broad categories

which helps us cater to their specific requirements: FX alpha-seeking clients typically macro funds or proprietary trading firms; banks or brokers executing on behalf of their clients; and companies or non-bank institutions funding or hedging other assets. However, there has been a spike in demand for electronic execution facilities from all three groups.”

Currie notes that many buy-side clients are seeking to “reward a smaller number of sell-side relationships” which has tended to draw them to single-bank platforms from which they


january 2014 e-FOREX | 79

Japan’s retail boom“We’ve seen a huge jump in retail trading activity starting in December 2012,” says Aite’s Javier Paz who has studied the Japanese retail market in detail. “This continued at a high rate throughout the first two quarters of 2013. And when I say “jump” I mean a more or less doubling of volume as compared to the first half of 2012. Although this is true of retail, we have also seen a corresponding increase in spot trading volumes on the institutional trading side and from corporates as well. It appears that they also wanted to trade off the back of Abenomics – though we can’t be sure.”

Paz goes on explain that about 90% of trades on the retail side are in EUR/YEN and USD/YEN with something of the order of USD150 bn per day being traded. Brokers such as GMO Click Securities, DMM Securities, IS Holdings are major facilitators of this trade and report volumes as large as many ECNs in the west. “That is remarkable. But a good deal of the trade is netted internally, buyers against sellers. So when BIS reports, it is based on the net figures provided by dealers and there is a whole lot of trading that never sees the interbank market,” adds Paz.

FXall’s Jonathan Woodward says that the fluctuation in the Yen has created great opportunities for retail traders.

Noriyuki Fujita, senior consultant at Nomura’s FX Department in Tokyo notes that the Japanese retail FX market grew dramatically in line with the recent Yen depreciation but he says that price competition has become more intense among brokers. “We expect more non-Japanese companies to enter the market in the near future.”

Suffice to say Japanese retail traders, often pictured as home-based “Mrs. Watanabes” are reckoned to account for the bulk of retail trading in Asia. This may change however with the growing wealth of Asia’s middle class, the wider availability of electronic trading across all countries in the region and the spread of Japan retail brokers’ influence into other geographical markets in due course.

Aiyana Currie

“Singapore has become the Asia sell-side hub for trading FX…”


may access research and, at the same time, speak to key contacts.

“While some firms have adopted a multi-dealer venue, in many cases, they continue to place a high premium on the bank relationship and openly share market-share data with us, which has the mutual benefit of improved spreads and increased share for the sell-side firms who provide additional services beyond price.”

The counter argument suggests that market participants want choice of execution. “While asset managers have been electronic for some time there is growth [in electronic trading] now among the corporates who have traditionally traded on the phone with the bank that provides their funding,” says FXall’s Jonathan Woodward. “They are learning that the FX flow can be separated from the funding requirement. Corporates are keen to get better pricing and STP. By 2017 there will be as many corporates in Asia with annual

revenues of over USD250m as there are in the US. They are also catching up with the US in the USD10 bn plus turnover category, according to Boston Consulting Group. Across the board, there is a lot of wealth being created in Asia, and this is increasing the demand for electronic trading. Hedge funds tend to work with their prime brokers and retail flow is all electronic because of the need to keep a tight control of their positions and get in and out of the market quickly.”

This view seems to be supported by Nomura’s Noriyuki Fujita. “A lot of foreign banks have provided their FX platforms to major institutional clients in the past and ECNs also showed good penetration. Corporate clients were not regular users of e-platforms due to limited FX requirements. Some ECNs faced latency issues with retail FX brokers this year and lost market shares. Instead we have observed more asset managers shifting to ECNs in light of multi-bank pricing.”

Similarly regulation is driving change both to electronic trading and to multibank offering. “We welcome regulation because we are well prepared for it having our roots in corporate Germany in the early 2000s,” says Simon Winn head of sales Asia at multibank platform 360T. “Regulation is going to push more people towards competitive pricing. People will, I think, move away from single bank platforms. I see potential for consolidation

among the five or six main players. I think that five years from now this will be down to three or four multibank platforms.”

What becomes clear the more single banks and multibank facility providers you speak to, is how difficult is to make money and sustain a business long term off the back of spot and forward volume. Spreads have tightened, the entire FX scene in Asia has become highly competitive and it is specialised and value added services where margin is best available.

new and SpecialiSed ServiceSThe multibank platforms have been leaders in supplying pre- and post trade services. The products are not new, at least not in the west, but as FXall’s Jonathan Woodward points out, Far Eastern corporates have been slower to adopt them and in many parts of Asia they are still using fax and e-mail for their post trade settlement and accounting activities.

Simon Winn of 360T sums up the situation, “I don’t think you can sell


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Chris Knight

“The knock-on impacts of the Dodd Frank swap execution facilities in 2013 and Europe’s MifID II rules coming in over 2014/15 will push the Asian markets to go electronic…”

Javier Paz

“Singapore is effectively positioning itself as the Geneva of Asia where a lot of wealth is stored…”


a platform purely on spot foreign exchange any more.”

“In our conversations with clients we prioritise NDFs, Swaps and Options over Spot FX as this is where we believe we can add most value. A large amount of the time we spend with clients is in a consultancy style of role. We offer guidance as to what the next steps could be for a client to help them advance along the evolutionary curve of e-FX. This is very much a one way street as client’s progress gradually up it and almost never come back down it. It’s a KYC situation where you need to know who your clients are, where they are at and where do they want to go to within the eFX world. Our aim is to help smooth the journey and add value to the client. This can range from simple STP for spot traders to our “staging area” solution for Asset Managers enabling pre trade allocation and netting of block trades to reduce transactional costs. The post trade data we provide to both market takers and market makers is second to none as we realise that high quality MIS and TCA are increasingly important for both sides of a trade.”

Against this background regional banks in particular face the problem of keeping pace with the technology needed to provide full STP and also to stay abreast of regulatory changes.

“In Asia new reporting regimes are about to begin,” says Jonathan Woodward. “Reporting in Malaysia will begin on 9 January and in Hong Kong some time in Q1 2014. Some banks are in fact already reporting. It will be challenging for banks and buy-side firms to keep up with what is going on, and to establish the connectivity to the different reporting infrastructures. Additionally, market participants may have to report to more than one regulator if they are a foreign owned entity operating in a different market. Providers like FXall can help them with regulatory compliance by reporting trades on their behalf.

On the product side the road ahead points to more synthetic products and towards tech-driven capabilities. “Automated and algorithmic FX trading as well as FX Prime brokerage services are all growing in popularity across the FX markets,” according to Joseph Ng, Head for FX at Phillip Futures in Singapore. “The popularity of automated FX can be attributed to the increasing attractiveness of strategy-based platforms such Meta Trader4, which allows retail clients to participate in systematic trading. With growing sophistication of clients, we see algo/automated trading helping to increase trading volumes across Asia. FX Prime services which allow institutions to link up with one another, and financial institutions to be connected to one another, creates an eco-community among

financial institutions of various sizes, letting them assess one another’s liquidity. Again, this eco-system could create opportunities for growth in terms of FX volume.”

This view is echoed by Mark Hanney at Valbury Capital. “The ECNs and e-platforms now routinely offer electronic execution of forwards, NDFs and swaps. In addition to this we have seen a requirement for single API feeds that cover CFDs, indices and commodities to complement their existing FX offering. Guaranteed transaction and reduction of counterparty exposures are also key drivers for investors transferring FX business to exchanges. The demise of MF Global had a particular impact in this respect andthis trend is likely to continue, as regulatory pressure mounts for FX business to become more transparent.” regulaTion driving changeEveryone who spoke to us for this article mentioned how important regulation is becoming in shaping the future of FX in Asia, as in every other geography.

“Regulators want a centrally cleared market to regulate because in the absence of that they haven’t the ability to oversee the OTC environment.” That is how Aite’s Javier Paz summarises the post-crisis regulatory imperative though he has reservations about how far regulatory inroads into OTC trading have reached. He continues, “On the one side the BIS finds that OTC grew from 2010 to 2013 by more than $1 trillion in daily volume. On exchange grew from something like $5 - $15 bn and now stands at $170 bn. So you can see while regulation may have an impact going forward, the market is quite content on the OTC side. And if we look at the on-exchange trading in well-established markets like equities, trading in dark pools is not


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Jonathan Woodward

“Corporates are learning that the FX flow can be separated from the funding requirement…”


falling but it is actually increasing. The exchanges meanwhile are fighting back to get traders to send more traffic their way.”

He goes on, “The overall trend is to move to electronic from voice although there are periods of high volatility in the market when voice does have a place in the market. So it has not gone altogether. Right

now regulators and the press are looking at how voice might have played a role in the fixing scandals, so that is not a good omen for voice either. In addition internal compliance may push for more oversight, which may have an effect on voice. There are new exchanges like LMAX and CME in Asia. The current fix scandal gives more ammunition to those who feel single

dealer platforms do not provide the best value.”

Unsurprisingly perhaps, though for capital efficiency reasons rather than those of transactional cost, CME Group’s Derek Sammann, senior managing director, FX, metals and options solutions, sees exchange trading as the road ahead. “Migration to on exchange is already happening. We have overtaken ICAP’s EBS platform in terms of average daily turnover and this is being driven by market expectations of Dodd Frank, EMIR and Basle III. Basle III probably has the biggest potential impact in terms of product choice because capital charges and margin requirements in terms of market-traded derivatives are more beneficial than cleared products, which, in turn, are more efficient than bi-lateral products. So from what we know so far, trading FX OTC bilaterally is going to get very expensive. You can reduce the capital expense firstly by clearing it and then reduce it again by trading it on exchange.”


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Japan Retail FX: Average Daily Trading Volume, Q4 2008 to Q1 2013 (Daily volume by quarter and major currency pair in US$billions)

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At Standard Chartered, Chris Knight also sees regulation as applying significant pressure. “The knock-on impacts of the Dodd Frank swap execution facilities in 2013 and Europe’s MifID II rules coming in over 2014/15 will push the Asian markets to go electronic. As the large US and European liquidity providers become required to execute trades electronically, it will also lead to a standardisation of hedging instruments. The next big change will also be an increase in NDF clearing once the US starts the ball rolling by mandating it for all US parties.” But perhaps the biggest change in regulation and which, for Asian markets, is the elephant in every dealing room and on every platform, is a relaxation of rules rather than additional constraint; it is the steady liberalisation of the renminbi. rmB and The fuTureSimon Winn of 360T provides some context, “If you look at the trade backed volumes of USDJPY versus the total FX transactions then you are looking at a ratio of less than 1%. If you apply the same ratio to the RMB then we have got a huge market waiting to open up.” Winn

describes the manner in which RMB internationalisation has so far been handled as “extremely professional” and, of course, no one knows when, and even if, full convertibility of the RMB will be achieved.

Nonetheless competition is already hot to become a force in the offshore trading of the currency of the world’s most populous nation. On 8th October 2013 the bank-owned communications network SWIFT announced that RMB is now “the 8th most traded currency in the world… overtaking the Swedish

Krona, The Korean Won and the Russian Rouble.

Right now CNH’s natural home is Hong Kong and no one knows whether Shanghai might become the Chinese currency’s chief trading hub, should full liberalisation come to pass. Meanwhile Singapore is making its position clear. “As an international trading and financial centre, Singapore will seek to support the growth of a resilient offshore renminbi market in the Asia region,” said Tharman Shanmugaratnam, chairman of the Monetary Authority of Singapore (MAS) speaking at a conference in Singapore. “Singapore can leverage on its strengths as a



Derek Sammann

“Migration to on-exchange is already happening...”

RMB as world payments currency

Source: SWIFT W

atchSource: SW

IFT Watch

key wholesale funding centre to increase liquidity and circulation of renminbi in Asia – it has traditionally supported the liquidity of the Asian markets and can partner China in creating sustainable offshore use of renminbi,” he said.

The prospect of RMB liberalisation has resulted in a number of major international banks and service providers offering advice and on-shore and offshore RMB services already. These include HSBC, Standard Chartered and RBS among others. Aite’s Javier Paz says that China may become a major retail market in five to ten years. “The appetite exists but what needs to happen is an acceleration in liberalisation and a welcome to volatility in exchange rates. We expect that EUR / RMB and YEN / RMB will develop into major traded currency pairs.” He adds a note of caution however, “The dollar is more worrying for China and its officials. Much of the wealth that they have amassed over the last years is in US Treasuries and they have a vested interest in not seeing that decrease.”

As a footnote to this, Jonathan Woodward’s view is that there

is going to be a great deal of new business done in CNH in the meantime but that there will also be many Chinese wanting to invest outside China. “A lot of the regional banks are looking to expand, across Asia and globally. And that includes the Chinese banks and they are looking for partners to help them do that.” FX is nothing if not a two way street.

reTail fXWhat the liberalisation of the RMB might in due course do for retail FX trading is an intriguing prospect. What if trading FX became as popular in the People’s Republic as it is in Japan?

Meanwhile the Japanese broking houses are already stretching their operations beyond the coasts of their own home market. Some are looking to access Malaysia and Indonesia where onshore FX trading is not permitted but where electronic trading through offshore based brokers is active. In addition,

in both Hong Kong and Macau, the Japanese firms have also been reaching out to find local partners who wish to add retail FX trading to their offering. Javier Paz adds, “We may see interesting developments there but I have to say, Korea for example is a case in point, regulatory controls keep the market from growing as big as could be. The rules put a lid on speculation in Korea. It is early days. However there is a growing crop of Asia firms, from Monex to GMO, CCC (City Credit Capital) out of the UK. There are a number of firms who are seeking to raise awareness of FX regardless of the regulations. This will provide an impetus for growth in the region after Tokyo.”

ouTlookLooking forward then, there are a number prospective avenues for the growth for FX trading in general. In all of them e-trading seems to be the only way to go, other than for those increasingly rare occasions when a one-to-one client-bank or client-broker conversation may provide better value or greater



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Simon Winn

“I don’t think you can sell a platform purely on spot foreign exchange any more.”



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understanding of the opportunity than that available on-line.

Regulation is a major driver. Each successive move in regulation out of Europe or the USA brings a corresponding response from the Asian centres of Singapore, Tokyo and Hong Kong. It seems unlikely that there will be any scope for regulatory arbitrage once EMIR, Dodd Frank, Basle III and other post crisis regulation comes into full effect, although regulatory progress seems at times both glacial and uncertain. This has not however daunted those in the fund management, wealth management and hedge fund sectors from Europe and North America from taking advantage of the initiatives put in place by the Singapore and Hong Kong authorities to encourage financial sector firms and businesses serving those firms from setting up there.

Yet there may be new players that will arise from the Asian markets themselves. Javier Paz believes that there may be scope for a Singapore

or Tokyo based multidealer platform to develop. “It would be a firm or market that understands the unique requirements and workflows of the region,” he surmises. “I think it is only a matter of time before this takes place.”

The future of the RMB remains an unknown but the direction and the pace of liberalisation has been set by the new Chinese administration. Its move to set up free zones onshore to encourage financial sector firms to trade there is widely seen as a significant step towards the development of Chinese onshore financial centres. While foreign exchange transactions involving buying or selling currencies other than RMB remain tightly controlled, the RMB itself is being promoted as a currency to do business in, and which can form part of the currency management and planning of international companies’ treasury operations. Small step though it may sound, this move could well be a significant one along the path of liberalisation.

maSS markeT fX in aSiaMeanwhile the availability of cheap, easy-to-use electronic platforms and the massive growth of retail trading in Japan are setting a course for mass market FX to develop.

Research carried out by Homi Kharas of Brookings Institution, the Washington based think tank, concludes that by 2030, just 16 years from now, the global middle

class will number 4.9 billion people and 64% of these people will be located in Asia where they will have vast disposable income.

“A great deal of wealth will need to be managed by funds - fixed income funds, equity funds and so forth,” argues FXall’s Woodward. Inevitably this will be invested in assets outside their native geography and currency, requiring a foreign exchange component.

Whether that wealth derives from Indonesia, Malaysia, Vietnam, Thailand or indeed the People’s Republic of China, its fungibility suggests that it will gravitate to financial hubs that are open, politically stable, are efficient and are on the mainline in terms of communications with the global financial market place. Singapore is positioning itself in the sweet spot where these features intersect. No wonder then that it is attracting such a lot of financial market activity at this time and that it is rapidly growing its share of global e-FX activity at the heart of Asia.

Joseph Ng

With growing sophistication of clients, we see algorithmic and automated trading helping to increase trading volumes across Asia.

Mark Hanney

“It could be argued that the independent brokers and ECNs were key in developing the sector, with constantly evolving platforms and online services, highly competitive pricing and access to a wide range of products…”

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