When the Government of Singapore Investment Corporation announced its asset allocation in July, it pledged to put more and more of its money into emerging markets, increasing investments in China, India, South Korea and Taiwan. Granted, it's an Asian enterprise in its own right, but its enthusiasm for emerging Asian assets, in emerging Asian currencies, was symbolic of growing interest in Asian foreign exchange.
"We're seeing more and more global allocation into the region," says Richard Yatsenga, head of foreign-exchange strategy for HSBC in Hong Kong. "Asia, while it is classified as an emerging region, in many ways offers characteristics more developed in nature. The volatility in the currency is not as high as in other regions, and having external surpluses provides people with some element of security."
Any discussion of investment flows tends to start with China, and so it is with forex too, despite the yuan not being fully convertible. "In the last one to two years there has been growing interest in Asian FX, because of China," says Peter Soh, managing director and head of foreign exchange, commodities and short-term interest rates in the global financial markets division at DBS. "There's speculation on the strength of the renminbi." And indeed, the currency is strengthening. But because of restrictions on capital-account convertibility, it's not strengthening as fast as it ordinarily would, which Soh says is prompting some investors to look instead at other Asian currencies.
One such currency is the Malaysian ringgit. "Malaysia is doing far better since the [1997-98] crisis, but the currency has not strengthened in any significant manner," he says. And the idea of proxy trades has brought investors into Singapore dollars, Thai baht, Korean won and the Taiwanese dollar. "The interest is coming from all over the world," says Soh. And it's reflected in greater allocations into other asset classes too, notably fixed income, as sophisticated foreign-exchange funds playing in the currency markets have to deploy their funds somewhere and typically opt for the bond markets for steady but decent returns. Yields for bills and notes in ringgit have fallen from 35% to 1.5% in recent years "because of constant buying: the deployment of FX", Soh says.
For banks active in foreign exchange, the debates are rather different in Asia than they are in G3 currencies (namely yen, euro and US dollars).
At a global level, and in Asia for banks focusing on G3, the main areas of discussion tend to revolve around technology, platforms and margins. At this end of town, the debates are technical.
Barclays Capital, for example, launched two-way streaming tradeable prices for forex options in April, as part of its proprietary platform, BARX for FX Trading. A highly sophisticated product, it offers tradeable prices of forex options across 17 currency pairs, from overnight to one year, with auto quoting in up to €100 million (US$126 million) in major currencies. It includes live streaming in two-leg strategies as well as single options, and the system plans to add more currency pairs including emerging-market currencies in due course.
These innovations followed the introduction the previous month of what Barclays bills Precision Pricing, allowing it to price to five decimal places in spot pricing online. Other banks can boast similar innovations, and this is increasingly where the differentiation is among the bigger players: highly complex and specialized modifications to online offerings.
Banks still conduct some foreign exchange through phone dealing, but increasingly discussion focuses on their online delivery channels, which fall into two categories: in-house portals and multi-bank products. Increasingly in forex houses' head offices there is a feeling that there are too many delivery channels out there, which causes confusion, dilution of the brand, higher technology and support costs, issues with liquidity management and, perhaps most importantly, narrower spreads.
The counterpoint to this view is that forex is a commoditized volume game in which transaction volume is everything. Consequently, it makes sense to be everywhere, and provide liquidity so broadly that it can appear indiscriminate from the outside.
Banks have to decide which platforms to support and which to ignore, and to what degree they should support clients on different platforms.
The situation has become much more complicated with the advent of complex trading strategies that act cross-platform, often hedge funds looking for inefficiencies in the ways banks quote across a range of portals. Some of these funds use quantitative trading programs that allow them to trade thousands of pairs a day, often holding positions for a matter of seconds. These opportunistic players can hurt banks despite the apparent benefits of order flow, since any exploitation of inefficiencies in banks' own pricing structure is typically done to their disadvantage.
Asiamoney asked one of the most important forex aggregators, EBS, for its views, (see box) but from the banks' perspective, the present arrangement is likely to stay.
"Our approach has always been to invest in technology, and invest a lot," says Clifford Cheah, head of foreign exchange and short-term interest-rate trading for Asia at Deutsche Bank. "It continues to be very important to us. We are active participants in electronic trading and it has given us an opportunity to do business with a whole new segment. We've seen with retail aggregators, the advance of technology has helped that market to grow."
And single-bank portals are likely to continue to exist alongside multi-bank models.
"You will have the co-existence of multi-bank and single-bank platforms," says Lutfey Siddiqi, head of risk advisory and corporate forex for Asia-Pacific at Barclays Capital. "Increasingly, clients are drawn to single-bank platforms because of the pre-sale and after-sale service you are able to get. There used to be a fear that you needed to go with multi-bank platforms because it's the only way to ensure the price is as competitive as you can get, but there is a realization that there's more to it than pricing. It's the ease with which you can navigate a system, the after-sales processes, how it links with straight-through processing and risk-management processes. Those are the main value drivers."
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Will there be a shakeout? "Which platforms and which models are going to survive—it's still too early to tell," says Cheah. "We'll see different products come on line over the next few years, and our approach is to work with them, and see what opportunities we can derive as a bank and closely monitor the situation. The key is to be investing in technology, with a hands-on approach to the changes."
But the complaint is that there are too many platforms. "I would say the abundance of platforms is good for the consumer," adds Cheah. "You've seen spreads tighten, as tight as they possibly can; one pip spreads in many cases. But platforms need to compete not just on price but value-add: reliability, whether it's always there 24/7, whether it's dependable."
If one takes it as read that technology can already provide ease of execution, and good and transparent pricing, then the next step is using it to help with portfolio and risk-reward analysis.
And in the corporate area in particular, people want contact. "One of the key things is you need to be with your clients day in day out, and be in touch on a daily basis," says Cheah. "We have tried to respond to that as a bank: we've invested in 15 hires in the corporate space in the last six months."
Besides, returning to the Asian local-currency level, technology isn't quite the powerhouse it is for G3. "Technology has not really affected us in the same way," says Soh at DBS, who argues that the market does not have the efficiency, liquidity or commoditized nature that has allowed technology to be such a driver of process and cost at global banks.
Asian currency trading has its own idiosyncrasies anyway. "In Asian currencies, one guy sells and 10 guys follow. You can't find any buyers," Soh says. "The liquidity is a lot deeper in G3 than in Asian currencies. If somebody here likes a story, the next 10 calls will be on the same thing: suddenly everyone is out the door and positions that have been built up in two or three months take three days for people to get out again."
Accounting changes in Asia have had an impact across the board, and old-style forex hands are finding they now have to be experts on accounting and corporate governance too. As the industry changes, so too do the skillsets required of its practitioners. "The structure and shape of the industry has changed so rapidly that people like myself are having to re-skill and up-skill, and in an accelerated and non-linear way," says Siddiqi. For an expert in structuring complex financial transactions having to get clued up about accounting and corporate finance issues probably doesn't feel like climbing the career ladder. "But increasingly you find that when you are talking to a corporate CFO, unless you understand their core business, they will not have time for you when you want to talk about the product you represent," he says. "You need to be more multi-dimensional."
Does the business need more people? "More specialized people," he says. "Pure execution, the manual execution of spot and forwards FX—it's fair to say that as an activity is going to be diminishing very quickly, taken over by e-commerce and technology. As a result, and at the same time, client appetite for advisory or solutions-led marketing is probably on the rise."