Thriving in the new FX marketplace

At the Fixed Income & FX Leaders Summit APAC, two panellists discussed the trends shaping and disrupting foreign exchange trading ecosystems – predicting that there could be more chaos to come.

In a fireside chat-style panel discussion at the Fixed Income & FX Leaders Summit APAC, speakers were asked about the trends shaping and disrupting the future of the FX trading ecosystems.

Panellists gave insights into how trading desk can rethink strategies to thrive in the fast-evolving FX market.

Sagar Anand, regional head of global markets at Edelweiss, noted that the last few years have been one of the most stimulating periods in the evolutionary journey of the FI and FX market ecosystem. Considering the proliferation of ancillary services, the merging of products, platforms and assets, and the emphatic adoption of technology – especially in the last six to eight years – Anand said that it reflects a very vibrant and dynamic ecosystem. “Say we focus only on market activity and the macro setting perspective. Even then, the last few years have been record-breaking and some of the more exciting than any other that survived my memory,” he said.

“The current phase, however, marks an important Inflexion point in this revolutionary journey in the sense that I believe from here on forward, the expectations, assumptions, and challenges for participants in this ecosystem will be quite different from one than what we are accustomed to. We are currently still in that process of metamorphosis, so it will be hasty to pinpoint, but it is safe to conclude that a lot of assumptions that we took for granted in the past will be relinquished,” added Anand.

“Going forward, regional policy development will be far more proactive and inward looking and highly sensitive to domestic constraints and aspirations. This is not to say that our key centres will not continue to exert influence, but I believe that the degree of this influence will be curbed, and policymakers will be less dispensed and more open to choosing diverse parts. As a consequence of this divergence, I believe that the asset price correlations that we know of empirically, will offer a lot of opportunities. I believe it will take time for the markets to adjust to the new paradigm or find an anchor and therefore the median market volatility will remain elevated for a longer period of time,” continued Anand.

On the other hand, Shiva Iyer, chief executive of Eaton Vance Management International, stated that he is unsure of whether the upcoming recession or currency drops would change something from an ecosystem standpoint. Instead, highlighting that the coming decade is probably one where you are going to see the importance of Asia growing in most global bond portfolios.

“If you take an EM bond portfolio, Asia is almost 40% – it’s very concentrated. Eventually we are going to see an index which is going to be close to 45-48% purely in Asia. That’s very important in terms of Asia also being a region which has high savings. Asia compared to all the regions – we have high inflation here too – but inflation is still under control when compared to Eastern Europe and even the US,” said Iyer.

Looking at how automation may impact the FX trading ecosystem, Iyer suggested that automation if more likely to become bespoke. “It’s going to move away from just automation at the point of execution, to being something which is end to end,” noted Iyer.

“The second trend that would disrupt, is increasing clearing of FX. You’re going to have Asia, which is going to be 50% of the portfolios. There’s going to be far more investment happening over here from a fixed income standpoint. I think people want to move far ahead in terms of scale to be able to deal with any number of counterparties possible by reducing their counterparty risk. Now what helps you do that is a centralised clearing, rather than having a lot of bilateral trades with counterparties or being exposed to one prime broker that you have. You’re probably much better off having your OTC derivatives cleared. Interest rate swap markets are already cleared and I think that’s a trend that FX markets have to catch up with, and eventually will be there,” added Iyer.

Elsewhere, Edelweiss’ Anand noted that one principle that should be fairly ubiquitous in this environment is that of diversification. “I think one of the key learnings from experiences, particularly in the last year, would be not to bank disproportionately on any platform, product, or offering. If one acts as a ‘one trick pony’, they’ll end up being quite vulnerable to old exposures or cyclical downturns,” said Anand.

Looking at some strategies that will help hedge businesses against the present mix of volatile markets, Iyer highlighted that a mix of volatile markets will help people hedge risks.

“I would say when you invest, it’s never been as important to make sure you’re expressing your view through the right instrument. If you have a view on monetary policy, you can’t be expressing your view through a 10-year duration bond. I think it’s far more important right now that you know what risk factor you’re taking, whether you’re betting on some monetary policy, a yield curve, FX, a spread, and make sure you isolate the risk factor you are betting on so that it can reduce the other size of the risk,” added Iyer.

“Sizing is also a very important factor, it’s never been as important before. The ability to take risks on their books are far less than where it used to be before, so one needs to be mindful of the ecosystem and not just live in the same old world where they feel like they once were able to do this with a certain amount of liquidity, so they should be able to do it now. Be cognisant about how the liquidity is in the market, size positions accordingly and pick the right instruments. Knowing that is exceptionally important from a risk management standpoint,” concluded Iyer.