Technology helps Asian corporate treasurers battle FX volatility
Over the past two years, shocks to the FX market seem to have come thick and foast. Central banks in jurisdictions from Switzerland to Japan have sparked turmoil with unexpected currency or interest rate moves, while geopolitical events such as the UK’s Brexit vote have added to the climate of uncertainty.
Technology has an increasing role in driving the sophistication of the FX workflow with features such as cutting-edge order-hedging capabilities. Users of the Thomson ReutersFX Trading platform can now take the strain out of currency exposure management by opting to hedge their risk automatically as part of an electronic workflow.
“Volatility requires attention. Manual workflows can be distracting and time consuming. Since we introduced a range of different models including bucket hedging, threshold hedging and even yield hedging,” says Luke Elliott, FX director – Asia at Thomson Reuters. “Our clients are telling us that there is a lot more flexibility over what they choose to warehouse and what they let the system order-hedge out on their behalf.”
The option has been warmly welcomed by hard-pressed FX market participants. “It’s been very popular, which is not surprising given the volatility that we’ve seen recently,” adds Elliott. “Having a system doing the hedging is obviously much easier than trying to do it manually when there is so much to cover.”
Automated order-hedging is not the only area of innovation in the FX workflow. Clients who manage their own risk now have access to an expanded range of advanced order types via the FX Trading platform, including icebergs, pegs and TWAPs.
Several of these were designed specifically to meet the needs of the Asian market. “Our Asian users, particularly those that are trading offshore renminbi, are very keen on icebergs,” says Elliott. “This is another example of the ways in which we are providing clients with more tools to help manage their risk.”
This new suite of automated order-hedging products is also proving particularly popular with corporate treasurers, partly due to the opportunities it offers for cutting the cost of managing currency exposures – a consideration that has come into increasing focus in recent years as credit has become more expensive.
“We know that some corporate treasurers have had to reduce their hedging activity due to increased cost,” says Elliott. “We have seen prime brokers exiting the market and that has driven up the price of credit, to the point where some clients haven’t been able to afford a pure prime brokerage relationship and have had to move to prime of prime solutions.”
Meanwhile, other ways in which Thomson Reuters has been working to deliver enhanced hedging capabilities to Asian clients include moves to increase the liquidity delivered via Tokyo. “Our major pricing centres were in London and New York, which provided a level of latency to clients in Asia,” explains Elliott. “Our new TY3 data centre in Tokyo will enable us to provide faster pricing to our Asian clients, which will reduce the risk of lower execution quality.”
Technology doesn’t just deliver benefits for workflows and hedging, however. Elliott notes that the concept of FX as a source of alpha is increasingly gaining traction in Asia as returns on traditional assets such as equities and fixed income remain meagre.
“FX is still mostly seen as an alternative asset class by regional investors, particularly on the retail side,” he says. “Specialist FX funds are telling us, however, that they are seeing growing interest in the asset given the opportunities to create value presented by the ongoing high volatility.”
From a currency perspective, meanwhile, the key trend in Asia remains an increasing focus on offshore renminbi. “We have seen a growing interest in the currency over the past three years,” says Elliott. “Clients are looking for pricing in CNH and CNH crosses, as well as increasingly for non-deliverable forwards (NDFs) and options.”
Demand for onshore renminbi pricing has also been mounting, particularly from corporate treasurers. “There is always a general request for pricing around onshore markets so we are trying to work with onshore liquidity providers in the renminbi market,” adds Elliott. “It is a complex procedure but it is something we will be very focused on for the next two years.”