Despite the dominance of voice trading, electronification is the natural path for Peru

Marco Merino, head of FX trading and algorithmics at Banco de Crédito (BCP), sits down with The TRADE, to unpack the opportunities Peru holds for investors, the electronification of NDF’s in the country, and how the market is evolving to further improve transparency.

What is the current state of play in Peru when it comes to market data and electronic pricing?

During the last few years, there has been a notable increase in financial institutions and corporates in Peru accessing offshore liquidity through electronic platforms, with transparency and high liquidity for G10 currencies some of the main drivers that promoted an increase in market activity. Foreign banks with well-established electronic platforms have been able to provide liquidity in spot and forward instruments. In the case of USD/PEN, the story is a little bit different. Local participants are less familiar with trading USD/PEN electronically which gives a large space to improve traded volumes and the number of participants. There is a learning curve and a change of mindset from local participants who are more used to trade USD/PEN through voice. One of the main reasons for this has been the limited availability of streaming services for USD/PEN.

In that sense, during the last three years BCP has dedicated significant efforts to provide streaming of the 1-month NDF for USD/PEN – through that foreign and local participants are able to access to our PEN liquidity during market hours. Despite the relative illiquidity of PEN, we have managed to provide adequate volumes shown on screen with a bid offer that is closely tied to the local interbank market which we leverage through our local market share. In that sense, we are now able to provide quotes from different tenors in the forward curve through both request for service (RFS) and request for quote (RFQ) services.  

How are platforms evolving to improve transparency in the Peruvian NDF market?

For many years, institutions outside of Peru have been accessing PEN liquidity mainly through large financial institutions who will eventually unload their market exposure with local banks. Nowadays, trading USD/PEN through electronic platform has allowed foreign accounts to access liquidity directly to the local market, levering on large institutions such as BCP. In that sense, we’ve seen a notable increase in volumes traded electronically accounting now for a relevant share of our daily activities. This has brought a closer connection and lower latency between offshore quotes and the interbank USD/PEN market prices.

Our intention in the future is to increase our market making activity by adding new platforms and counterparties to our pricing engine. For this purpose, two key drivers have been relevant for increasing liquidity and transparency in USD/PEN: The technology platform and the credit mitigants. For the latter, we’ve allocated resources to develop prime brokerage agreements and since 2023, we have been able to trade USD/PEN non-deliverable forwards (NDF) through LSEG’s LCH and CME. Both solutions have been crucial in order to allow trading with hedge funds and real money institutions, and also deal with regulations such as initial margin requirements for US and European banks.   

How would you describe the current market depth in Peru?

The USD/PEN spot interbank market trades around $300 million on a daily basis with a similar amount negotiated through the 1-month NDF market. As is the case with other currencies in the region, the currency only trades within a fixed period of time. Liquidity outside those hours is limited and will depend mainly on bank’s positioning. Despite these restrictions, which are common across Andean currency markets, market liquidity has improved during the last years and market access is not restricted to the amounts traded in the interbank market.

We expect this to continue in the next years, along with an increasing demand for PEN streaming capabilities that hopefully will allow trading of new instruments such as the fixing rate. We also hope to see in the short term the first steps in the local market for algorithmic trading tools for PEN considering the recent improvements in the “fix” protocols between local banks and the main interbank venue, Datatec.

How can electronification in NDFs be accelerated in Peru, what is the main hurdle?  

Electronification should be a natural path for Peru. There is a clear dominance of trading based on voice and relationships, but the benefits brought by electronic trading are relevant, especially to local participants. In that sense, one of the main hurdles is related to having the right infrastructure and capabilities to connect with the different venues and market participants. For BCP, our relationship with Edgewater for example has been crucial to streaming our liquidity to offshore counterparties either through their platform, our white label solutions, or direct pricing streaming in Bloomberg’s trading grid. 

This is not trivial considering that many foreign banks can leverage on their already up and running technology, while local institutions have to decide whether to partner with third parties or incur in an in-house development. Having this kind of technology allows local banks to provide white label solutions to local counterparties that are relevant to the currency dynamics. This is the case for pension funds, mining companies and large conglomerates which are active in the daily negotiation of the USD/PEN. We are enthusiastic about the next steps in PEN electronification, and it should be one of our main focuses in the years to come.

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