e-Forex-Nov-23

FX on the Exchanges: Demand grows while work continues to launch new products.
FX ON EXCHANGES
“The increased volatility of Asian currencies due to divergent
monetary policies across central banks, alongside geopolitical and
economic uncertainties, have led to heightened risk management
and hedging activities across our key SGX FX futures contracts.”
VOLATILE MARKET
CONDITIONS
Alongside the evolving regulatory
regimes as a result of UMR and
SA-CCR which has led to investors’
increased use of listed FX futures to
help reduce capital costs, another
headwind for listed FX has been the
volatile market conditions, says KC
Lam, global head of FX rates at SGX
Group. “The past year has seen one
of the most volatile global interest rate
rises and inflation in recent history,” he
says.
“The increased volatility of Asian
currencies due to divergent monetary
policies across central banks,
alongside geopolitical and economic
uncertainties, have led to heightened
risk management and hedging
activities across our key SGX FX
futures contracts. Notably, activity
and liquidity from US and European
market participants has been on the
rise, with over 40% of SGX FX futures
traded in US and European trading
hours.”
SGX has looked to build on this
KC Lam
increased demand by launching two
new market data offerings – the SGX
Trade-Weighted CNY Index that tracks
the performance of a basket of five
major trading partners of China, and
the SGX Trade-Weighted INR Index that
tracks the performance of a basket of
five major trading partners of India.
The exchange has also looking to
improve its trading platform Titan
to support the increase in products,
participants and volumes, including
extended trading hours, enhanced
risk controls and system safeguards to
help market participants manage their
trading and clearing positions round
the clock.
And more recently it has focused on
market structure improvements for FX
derivatives. These include enabling bait
orders in our trade registration system
for SGX USD/CNH Futures to improve
price discovery and advertise the
liquidity available in the marketplace.
“This has resulted in tighter top-ofbook
quotes especially for longer
tenure contracts. This will also help
create implied out orders based on an
outright together with a spread order,
which will increase liquidity across the
curve,” says Lam.
“To cater to firms that utilise different
Trading Codes or brokers to route their
orders, we enhanced our Self-Trade
Prevention (STP) feature to include
a higher level of STP at the Trading
Group level (STP-TG); preventing orders
from participants that belong to the
same STP-TG from matching,” says
Lam. “To address feedback from OTC
participants wanting to engage in
cross-product strategies, we launched
USD/INR month-end contracts, making
us the only international exchange to
offer conventional USD base currency
quotes.”
“To make it easier for participants
to transact in large sizes without
impacting the price of the underlying,
we implemented the Titan OTC RFQ to
facilitate block trades, allowing larger
trades to execute more quickly and
efficiently. And to enable clients to trade
at-reference to an IOSCO benchmark
and participants to enter and exit
positions based on a single price point
with a deep pool of liquidity, we have
embarked on delivering the ability to
trade at a reference rate,” says Lam.
“To enable clients who would like to
replicate OTC FX forward positions but
using the listed cleared futures format,
SGX has introduced FlexC FX futures
allowing participants to effectively
mitigate counterparty credit risk with the
flexibility of retaining bilateral trading
relationships. This brings about lower
margin costs and capital requirements
and at same time enhancing capital and
operational efficiencies,” says Lam.
Lam also referenced the steps taken
to widen the exchange’s international
footprint, attract new clients and grow
their FX products and services. “As
regulatory developments such as Basel
III SA-CCR and UMR Phase 6 came into
full force, we drove industry discussions
locally and globally to educate clients on
navigating changing regulations,” says
Lam. “We also publish comprehensive
educational material on UMR and SA-
CCR on our website, including steps on
how clients can utilise our derivatives to
increase capital efficiency.”
Lam also says that the exchange
continues its ambition to bridge the
FX OTC and futures worlds. “We are
the only FX futures exchange in Asia
with an OTC FX trading venue and
full OTC FX workflow automation. We
also launched SGX CurrencyNode, an
FX electronic communication network
that connects global participants
anonymously to unique and deep OTC
FX liquidity pools.”
54 NOVEMBER 2023 e-FOREX