Customer demand in Asia for the trading of NDFs is increasing. How will LSEG’s replatforming of FX venues help to address this need?
- LSEG is to deploy a modern and flexible technology platform for its FX venues, to future-proof its technology and improve customer experience. Venues include FXall, as well as Matching.
- Beginning in 2023, these FX venues will be migrated to a common core technology platform, which will enable LSEG to offer several new features, empowering customers to trade more efficiently.
- An important new feature will be the trading of NDFs (non-deliverable forwards) in Singapore to meet customer demand in Asia.
NDFs are an efficient way to hedge FX exposure against non-convertible currencies in illiquid markets. They allow an exchange rate to be locked in for a certain period in the future, but with no settlement in the non-convertible currency – rather, the entire transaction is settled in the convertible currency.
According to the Bank for International Settlements’ (BIS) 2019 Triennial FX Survey, the average daily volume of NDF transactions almost doubled between 2016 and 2019, increasing from $134bn to $258bn. This rise reflects customers increasingly trading in emerging market’s currencies.
Asia is a large, and growing, market for NDF trading, with the most traded NDF currencies worldwide.
For the Korean won (KRW), Indian rupee (INR), and New Taiwan dollar (TWD), NDF volumes exceed turnover in other FX products including Spot transactions.
Sizeable NDF markets also exist for the Chinese yuan (CNY) and the Indonesian rupiah (IDR), with smaller markets for the Malaysian ringgit (MYR), Philippine peso (PHP) and Vietnamese dong (VND).
NDFs have multiple uses – investors in emerging markets use them to hedge currency risk and multinational companies employ them to mitigate market volatility. Meanwhile, banks and hedge funds use the instrument to take speculative positions.
The benefits of NDF Matching
Launching in mid-2023, LSEG’s NDF Matching service will be a fully cleared Central Limit Order Book (CLOB). Based in Singapore, it will be launched with the support of the Monetary Authority of Singapore (MAS).
NDF Matching will be the first new service to use LSEG’s common core technology platform. The NDF service is being developed in response to customer demand in Asia for an NDF CLOB, as market participants look for greater choice in the execution of NDFs.
Trades will be executed in a variety of ways, with off-venue, MTFs or SEFs being cleared via LSEG’s LCH ForexClear, which currently clears an average $100bn of NDFs daily (Q1 2022).
Clearing NDFs will reduce risk, increase operational efficiency, and open up the service for an expanded group of participants to become NDF market makers for the first time.
NDF Matching will differ from existing solutions that operate centralised or bilateral credit models and effectively restrict opportunities to Tier 1 and Tier 2 banks.
It will allow a more diverse range of market participants, including buy-side firms, which will create a more diverse pool of liquidity.
This will benefit not only LSEG’s customers in terms of simplified credit management and operational efficiencies (including lower costs) but is also expected to drive growth in the NDF market as a whole.
Replatforming to enable customer success
It would not be possible to offer NDF Matching using Refinitiv’s existing legacy technology, which reflects several decades of acquisition and development across several platforms.
LSEG is committed to future-proofing its solutions by migrating its FX venues in 2023 to Millennium, a state-of-the-art, cross-asset technology that powers the London Stock Exchange. The migration will be the first step in the evolution of these venues as LSEG adapts to the constantly evolving structure of the FX markets.
Processing about $460bn in trades each day and connecting customers to over 200 banks in 130 countries, LSEG’s ecosystem of FX trading platforms is unrivalled.
The deployment of a common core technology platform will improve system performance, increase trading efficiency and allow traders to benefit from end-to-end FX workflow capabilities via Refinitiv Workspace, which interconnects data, analytics, trading workflow and liquidity via various native workflow tools.
Designed to be more than just a technology upgrade, the migration will offer a wide range of new benefits to LSEG’s customers, enabling them to trade more efficiently as new trading types, products and order types are developed.
Watch: FX Ecosystem – Refinitiv, an LSEG business
Commitment to Asia
The growing interest in trading emerging market currencies combined with Singapore’s leading position as Asia’s regional FX hub is expected to see NDF volumes in the region continue to grow rapidly.
Singapore is currently ranked the largest FX centre in Asia and the third-largest globally.
The development of NDF Matching in response to Asian customer demand highlights LSEG’s commitment to the region, while the location of the service in Singapore is designed to minimise trading latencies in Asia.
With the continued support of the MAS, LSEG looks forward to being able to meet the growing needs of FX market participants in the region.
LSEG is currently establishing integration test environments for NDF Matching with a view to a full launch in summer 2023.