The TRADE predictions series 2022: foreign exchange

Interest rate uncertainty, incoming regulation and the rise of non-deliverable forwards (NDFs) and algorithms for execution are the topics on the minds of these FX-focused individuals.

By Editors

Given the current uncertain interest rate environment the interest rate differential between two currencies becomes critical for any clients trading FX forwards or FX swaps. These differentials combine with overarching supply and demand forces from the marketplace to help determine the price at which customers can trade.

So called ‘flights to quality’ and holding ‘safe haven’ currencies can be strong factors in setting the overall price within the FX market, and this may be a key area of focus in 2022 as the pandemic evolves. Given the largely over the counter (OTC) nature of FX forwards and FX swaps, clients are typically somewhat reliant on prices obtained from their dealers to help form a clear picture of where the market is trading. In addition, the effects of SA-CCR being further understood by the sell-side and Phase 6 of Uncleared Margin Rules (UMR) inching ever closer, will likely intensify the focus of market participants in finding optimal liquidity for their FX options activity that also helps to optimise their capital and margin costs. Many buy-side clients have historically traded bilaterally and used a request for quote (RFQ) process with their dealer counterparts to gauge where the market is trading and to find the optimal price available to them. We are now seeing an increasing number of clients add listed FX options as a complementary part of their execution strategy given the diversified pricing available combined with the margin and capital efficiencies of clearing.

– Paul Houston, global head of FX products at CME Group

 The desire for good data will keep increasing. While most market participants are now familiar with getting transaction cost analysis (TCA) reports for their algo orders, a few emerging start-ups are aiming to replicate the same experience when clients trade directly with their liquidity providers. The key here is to remove the burden of processing large datasets from the clients, and instead give them actionable analytics they can use straight away. This has, and will continue to, empower clients to carefully review their costs of trading, compare differences between their liquidity providers and should lead to better execution outcomes. We also continue to see the share of volume traded electronically increasing in non-deliverable forward (NDF). This year a number of banks expanded their algo execution suite to cover NDF pairs and we see an ever-growing interest from clients. In parallel, more ECNs entered the space, and we observe an increased amount of liquidity available. We think it’s important to cover all NDFs across the board, not just specific pairs like Asian NDFs, to ensure the client’s experience is seamless and unified. A complete platform will be a benefit to clients who wants to trade all their assets from a single place.

– Arnaud Floesser, head of core e-FX trading, JP Morgan