Neill Penney is Managing Director, Co-Head of Trading, at Refinitiv. He also serves as the London Foreign Exchange Joint Standing Committee’s private sector representative on the Global Foreign Exchange Committee (GFXC), which promotes and maintains the FX Global Code. II spoke with Penney regarding the evolution of foreign exchange (FX) in emerging markets, and relevant, effective tools for corporate treasurers, traders, and central banks.
Demand for FX is increasing globally, particularly in emerging markets. What’s driving that demand?
Neill Penney: The overall driver is the growing importance of emerging markets in the world economy and the increasing level of interconnectedness between nations. For example, we have the continued growth of manufacturing in emerging markets, which creates demand for FX to fund those operations and pay for the end products. We have increasing levels of investment in emerging market by financial investors in developed markets. And in the other direction, there are growing levels of wealth in emerging markets, some of which is being invested into developed markets.
Emerging markets always present challenges. What are the critical ones facing FX traders in these markets?
Penney: Liquidity fragmentation, lack of transparency, and financial regulations are among the challenges facing FX traders in the private sector. Asset managers and hedge funds need to consider issues like volatility and the risk-return ratio as part of a broader investment strategy. Corporate treasurers need to understand any special rules in each country, as some currencies are not easily convertible. In Brazil, for example, every FX trade needs documentation that it was conducted for authorized purposes. In this case, the requirement to attach an invoice to every transaction and send it to the central authorities adds time and overhead costs to processes.
Are central banks doing anything to address these issues?
Penney: Many central banks are visibly keen to build a modern market infrastructure. They recognize that global trade is vital to the future of their economies, and want to make the FX process as friction-free as possible whilst ensuring a robust and safe financial market. In many cases, they are leveraging best practices globally. This can include using products from companies like Refinitiv to support access to local and global liquidity by market participants; operate benchmarks; and collect accurate, timely information on FX trades.
How can Refinitiv’s solutions help banks and traders in emerging markets?
Penney: We aim to be a trusted partner to central banks and financial institutions in emerging markets. We aim to work at a country level, better enabling the ecosystem of dealers across the country rather than selling to individual participants. The importance of community is something we understand very well from operating our Dealing product, which connects 16,000 of the world’s foreign exchange professionals.
For example, a central bank that auctions currency may be looking for a tool to connect their primary dealers nationwide in the auction process, receiving bid levels, setting allocations, and communicating auction results. Rather than doing this by phone, our Auction product lends itself to a more efficient and less error-prone process for all parties.
We also offer solutions for human-to-human trading in those markets that have insufficient liquidity to support automated electronic trading. Our Callouts solution allows traders to see the amounts, bringing a higher level of certainty. We released this product in several countries last year, starting with a focus in sub-Saharan Africa. It has proven to be very effective for these purposes. Platforms such as Dealing and Callouts are especially important in markets where liquidity and credit are weak: in these markets, personal relationships are a critical enabler of the transaction process.
How do central banks feel about the FX Global Code?
Penney: The FX Global Code is a unique collaboration between the public and private sectors, with central banks and industry participants coming together on a global basis to set expectations around conduct in the FX industry going forward. As Thomson Reuters we were privileged to be involved in its creation, and now as Refinitiv, we continue to be part of its evolution. As you’d expect, central banks are highly supportive of the Code, and continue to be the main sponsoring and driving force. This is especially so in many emerging markets, where the Code provides a global, ‘off the peg,’ gold standard solution for industry conduct. The Code enables central banks to leverage work already carried out rather than trying to develop new rules and regulations from scratch.
Which emerging markets are most likely to move forward with FX electronic platforms in the next few years?
Penney: Every market is different, but there are some universal trends. All countries are looking to ensure their markets are operated in a way that is fair and effective. All are looking to create more liquid markets in their countries, increasing the choices of end users and making tighter prices available. And finally, all are looking to increase levels of trade automation. This increases execution efficiency and reduces errors, making access to the market both cheaper and easier for end users.
That said, different countries are approaching this evolution in different ways and at different speeds. Our FX franchise is truly global, covering 130 countries and connecting over 8,000 FX bank traders in emerging markets. We aim to provide solutions that cover the entire spectrum. I’ll give you some examples to illustrate the diversity of customer needs across emerging markets. In Brazil, we are seeing a growing need by banks for technology that enables them to electronically price their customers; we are fulfilling this through our “ET” rate engine solution. In Malaysia, we are working with banks and large corporations to launch FXall as a solution for multibank FX trading. In Uganda, we are just rolling out our Callouts product that helps streamline processes where two dealers trade directly with each other.
What about the risks of FX trading in emerging markets?
Penney: In a world of growing regulatory complexity and oversight of the trading process, market participants have a shrinking appetite for operational risk. This is true on a global basis, not just in emerging markets. However, in emerging markets, potentially with greater volatility and thinner liquidity, the impact of errors can be more severe. At Refinitiv, our particular focus is to help ensure that the core trading process is as trustworthy, reliable, efficient, and resistant to errors as possible. We do this in two ways. First, we want to make it easy for our customers to find the right price for their transaction, and to have the assurance that the market they are trading in is fair, effective, and operating according to the latest standards of conduct. Second, we aim to help them automate the processes around the trade itself, reducing re-keying of information, streamlining processing, and providing detailed reporting.