Electronification rising amid turbulence: Taking a closer look at the MENA FX picture REGIONAL E-FX PERSPECTIVE “Like elsewhere, the buyside across the MENA region is eager to understand trade costs and what their impact is on the market and how their liquidity will be used.” Albert Blackburn HSBC’s Almohri agrees. “Local banks are adapting to electronification at pace,” he says. “It’s a strong trend that we do not see slowing down anytime soon. This has involved material changes in workflow, processes, and technological buildout, which, as one might expect, can carry operational risks in their execution and, therefore, might require adjustment in planning timelines.” Blackburn notes that LSEG doesn’t view the region as an emerging market, as is the prevalent global view. Several GCC countries only recently moved from the MSCI Frontier Markets index to the Emerging Markets one. While this move has accelerated FDI inflows, volumes remain small compared to global benchmarks. He explains further. “Many of the regional firms have been engaged in electronic trading in the global FX market for many years,” he says. “Whilst there are opportunities to support governments and central banks evolve market structure as countries look to reform access to their domestic currencies, we see no difference in the levels of client sophistication in this region to any other.” DEMAND FROM SOPHISTICATED INVESTORS Regulation and continued government investment in infrastructure are slowly turning the GCC into a hub for sophisticated investors. Almohri lists a few reasons for several hedge funds and asset managers setting up shop here. “Exponential growth in the region’s debt capital markets, following the oil Many asset managers and hedge funds have moved their physical locations to MENA, to capitalise on the economic growth of the region price drops between 2014 to 2016, together with the transformation and economic diversification plans in MENA, has attracted a large number of hedge funds and asset managers into the region,” he says. “With that, we have observed a higher interest in methods of execution and data analytics, which are tailored for a more sophisticated segment of the market.” “We have observed more demand and FX flow driven by foreign investors,” he continues. “This has been in response to policy changes leading to a relaxation of restrictions on foreign ownership of assets and allowing more access to the market.” As electronification steadily rises, algo adoption is also increasing. “FX algo execution is still at an early stage of adoption in MENA,” cautions Almohri, “although it is becoming a growing topic of discussion with clients as an additional tool at their disposal, particularly among institutions that trade equities. Algorithmic stock executions are more mature and already embedded in their typical workflow.” And what does the electronic versus voice trading picture look like? Some MENA currencies are famously illiquid. Has electronification changed that picture? Blackburn and Almohri reckon it hasn’t. “Electronic markets are now the norm in more established and larger Middle East economies,” Blackburn says, “however in smaller markets, central banks are seeking to work with their local counterparties to facilitate orderly markets. In some regions e-trading is still relatively new, continued pressures on credit and banks are facilitating this approach.” “Voice trading is still the preferred channel for large transactions,” Almohri says, “where electronic liquidity doesn’t exist or is particularly thin. One significant factor for further increasing electronic liquidity distribution would 36 NOVEMBER 20<strong>23</strong> e-FOREX
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