As digitisation continues to evolve, how can central banks in frontier markets use technology to improve the efficiency of their financial markets?
- Recent advances in technology mean that global financial markets are evolving more rapidly than ever before.
- Central banks are increasingly recognising the role technology, and digitisation in particular, can play in improving the operational efficiency of financial markets.
- The transparency and efficiency that automation brings to frontier markets is key to making these markets more attractive to international participants.
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Central banks around the world are recognising that automation, including the efficient delivery of data, can lead to more efficient operation of their financial infrastructures.
For frontier markets, in particular, the availability of new technology presents the opportunity to compete on a global level.
Legacy tools and manual processes that have hampered transparency and efficiency within these markets need to be reduced or even eliminated in order to achieve this.
What are frontier markets?
Frontier markets can be broadly defined as countries that are considered to be less mature than emerging markets. Contributing characteristics include, but are not limited to, demographics, economic development, political stability and liquidity.
Indexers and benchmarks vary in the way that they classify frontier markets; there is no universally accepted definition.
FTSE Russell’s classification criteria include the depth and breadth of financial markets, legal and regulatory infrastructure, and general ease with which foreign investors can do business.
In the past, frontier markets were characterised by instability, restricted market accessibility and low liquidity. However, with young populations, relatively low debt and fast economic growth, frontier markets today offer many of the opportunities that emerging markets offered two decades ago.
As of 31 March 2022, FTSE Russell classified 30 countries as frontier markets.
Automating the trade lifecycle in primary markets
Digitisation can be applied at every stage of the trade lifecycle.
Central banks conduct auctions and open market operations to manage currency flows and facilitate international trade. Frontier markets have been disadvantaged by their inability to operate the transparent and compliant processes required for these operations.
The use of legacy systems with multiple components can mean numerous potential points of failure.
In some markets, such as Guinea and Myanmar, auction bids have traditionally been submitted in person and entered manually into a spreadsheet for adjudication, meaning that dealers have needed to be physically present at the central bank for the entire auction process.
In Albania, auction statistics have in the past been posted to the market hours after the auction closed, due to the time taken to run the allocation.
Automating the auction process in these markets has allowed central banks and ministries of finance to manage their entire auction workflow from announcement to results publication.
How can digitisation help secondary markets?
The impact of automation in secondary markets is particularly significant in frontier markets where liquidity can be scarce.
In sub-Saharan African markets, for example, countries need to protect FX reserves and access new liquidity pools.
Leveraging technology can allow access to deeper offshore liquidity and increased trading volumes. Transparency and accuracy are also improved, all of which are attractive to external market participants wanting to trade in these markets.
Benchmarks, reporting and market surveillance
In order to earn the confidence of international market participants, central banks in frontier markets need to be seen constantly to monitor markets so that they can intervene in the case of a breach of trading regulations.
Reliable technology is key in helping central banks to monitor markets accurately and to implement international market standards. Benchmarks play an important part in helping central banks to evaluate interbank borrowing costs and better understand the way markets function under their jurisdiction.
Data and analytics
Access to data that focuses on events affecting global financial markets is an increasingly important resource for central banks in frontier markets, along with pricing and market data.
Technology that delivers such data accurately and quickly is valuable to central banks in formulating monetary policy and in making their market attractive to global investors.
How Refinitiv has partnered with frontier markets for digitisation
Refinitiv’s suite of solutions for central banks encompasses the entire trade cycle, from automated workflows to simplify open market operations and auctions, providing market access through trading tools to allow bilateral dealing and liquidity access, to market surveillance tools, analytics and data.
Different solutions for different markets
Although certain issues are common across emerging and frontier markets, it should be noted that they do not necessarily share the same levels of sophistication. Technology needs to cater for the specific needs of each market.
Bank Indonesia, having already automated its primary market auctions, has introduced an FX Central Limit Order Book system, such as Refinitiv Matching, to complement conversational dealing and increase liquidity, efficiency and market transparency.
Bank Indonesia also obtains in-depth trading data using Refinitiv Market Tracker. In this way, the central bank can easily view the markets under its jurisdiction and calculate its trade-based benchmarks. Market surveillance solutions are also in place to detect breaches in market regulations.
Guinea is a less developed market. As part of its central bank’s commitment to market reforms, it wanted to more efficiently manage its foreign currency transactions by reducing its reliance on manual processes.
With Refinitiv’s help, the central bank was able to automate its FX auction processes, giving it real-time visibility of the market’s needs and allocating funds electronically.
Further accelerating the process of digitisation for Guinea’s financial markets, Refinitiv’s solution facilitated the reporting of foreign currency transactions back to the central bank, allowing the bank a real-time view of market liquidity.
Digitisation fostering frontier market growth
For frontier markets with high growth potential courting foreign investors, the advantages of e-trading are clear.
In Vietnam, the launch of Refinitiv’s Matching service represented the first electronic marketplace for the trading of VND.
In the first few months following the launch, over 30 major market players signed up to trade USD/VND through Matching, which offers easy price discovery and efficient execution as well as other benefits of e-trading.
Appealing to international finance markets
With developed, and even emerging, markets becoming more and more crowded, access to frontier markets is ever more desirable to international financial market participants.
Central banks within frontier markets need to take steps to ensure that their markets have a robust and modern framework and strong governance and systems in place in order to attract overseas investors
The pace of digital evolution differs across countries and regions, so different solutions will be needed to support different processes. It is therefore important for central banks in frontier markets to find the right technology partner to support their own unique needs.
As the global financial market ecosystem continues to evolve, Refinitiv is committed to enhancing and developing technology solutions for frontier markets, working closely with central banks and other participants to promote the development of fair and efficient markets.