Latin American e-FX: What’s fuelling the expansion?

It has been a good year for FX in Latin America, thanks in part to a boom in metals and commodities trading as well as carry demand for region’s high yielding government bonds. 

This is building on a long-term trend. According to the BIS, current daily trading levels for OTC FX instruments are around $300bn, compared to just $20bn at the start of the century. The Mexican peso and Brazilian real make up the majority of these totals, accounting for around $150bn and $100bn respectively. 

In terms of instruments, spot transactions make up 39.3% of the average daily FX trading volume, followed by outright forwards (30.4%), FX swaps (21.5%), options (5.1%) and currency swaps (3.7%). 

According to ING, a legacy of high inflation and a hawkish Brazilian central bank has made the real the region’s top performer so far this year with spot gains of 15% against the dollar and total return of 28%. 

A big driver for the region has been the surge in metals trading, copper and gold especially, which have served as a major tailwind for countries like Chile and Peru. However, these tailwinds have to be offset against the geopolitics of the region which in turn has led to currency volatility. For example, Mexico is exposed to a US trade war and tariffs while Chile faces an election before the year-end.

There is also a rapidly developing e-FX market. Fintech offerings, alternative payment methods and digital currencies are growing across the region. This is partly due to the rising number of retail investors in countries such as Mexico, Brazil, Argentina and Colombia – many of which are young, digitally-native and interested in instruments other than equities, such as FX. 

However, there is still some ground to make up before the LatAm market matches the G10 currencies in terms of e-FX adoption. 

Lack of liquidity and electronification

According to Miguel Ángel Sánchez Jiménez, an e-FX Quant at BBVA, the key difference between G10 and LatAm currencies does not lie primarily in geopolitical or commodity market factors, but rather in the lack of liquidity and electronification. 

“In recent years, we’ve witnessed a clear increase in geopolitical tensions that have also affected traditional G10 currency pairs. However, the main distinction remains the level of liquidity available and the degree of market electronification,” says Jiménez.

“A great example is the USDMXN, which operates as a 24/7 open market and serves as a proxy for the rest of the LatAm pairs. Nowadays, its behaviour is increasingly similar to that of a G10 currency pair rather than a traditional LatAm one,” he says. 

Jiménez strongly believes that best execution, transparency and regulatory compliance are three elements driving institutional demand for e-FX trading services in the region. “These elements will soon become must-haves, just as they already are in other currency markets. We’ve seen most Real Money accounts and Central Banks in the region transitioning from traditional voice channels to electronic platforms, reflecting a clear shift toward greater transparency and efficiency in execution.”

Jiménez notes that local banks in Latin America have been positioning themselves with electronic FX platforms to compete globally, and broadening their product and service portfolios by adopting more flexible and powerful electronic trading platforms, real-time pricing solutions, and pre- and post-trade FX toolsets. 

“I’ve been quite impressed by how many local banks are upgrading their technological FX infrastructure toward state-of-the-art e-FX solutions and providers,” says Jiménez. “They are clearly aligning themselves with global standards in pricing, distribution, and electronic execution, following the natural evolution of the industry.”

Next-generation technologies like AI and machine learning (ML) are also accelerating the growth and adoption of e-FX across both institutional and retail trading markets in the region, says Jiménez. “Machine Learning is already a well-established and mature field that has been applied in financial markets for many years,” he says. 

“Artificial Intelligence, meanwhile, serves as a broader framework that encompasses ML and other disciplines such as Deep Learning. Its potential applications are much wider, although it has so far been less integrated into traditional workflows. That said, there is still a great deal of misunderstanding about what AI can and cannot do — and what it will eventually be able to achieve in the near future.”

Digital transformation

According to Jose-Antonio Buenaño, Head of Sales Americas at Edgewater Markets, Latam e-FX growth is being fuelled by digital transformation.  “Latam e-FX growth is being fueled by digital transformation.  Both participants and regulators have embraced technology as a tool they can use to level the playing field to enabling local regulated banks to be the owners of their currencies both onshore and offshore through the use of NDFs,”  says Buenaño.  “Electronification continues to expand across products and tenors, its common place now to transact NDF broken dates and swaps electronically, with local banks pricing to full range of the curve, servicing demand of offshore participants.  None of this can be done without technology and credit intermediation, either bilaterally or through central clearing prime brokers.  This opens the door for countries such as Argentina to enter the global markets quickly, as well as establish a path for existing NDF market regulators to consider allowing offshore deliverable currency trading given the transparency and market data available with electronic trading.”

Demographic have shifted toward a younger, tech driven population that has pushed the rapid adoption that has accelerated e-FX in Latin America, says Buenaño. “Digital banking is now common, and cross-border services are driving demand for transparent, real-time FX pricing and automated electronic execution across the region.  AI is also being used by the larger regional player, who are applying the technology to predictive trading, which requires large electronically stored data sets.”

Currency volatility tied to commodities and geopolitical tensions directly shapes e-FX trading strategies in LatAm, increasing volumes and FX trade flows, says Buenaño. “Traders rely on electronic platforms now more than ever, for the associated faster price discovery, tighter risk controls, and automated hedging. In addition, the higher volatility increases demand for NDFs algorithmic execution, which require real-time electronically traded liquidity, pushing markets toward deeper electronification and smarter, risk-adaptive trading strategies.”

Transparency, best execution, and regulatory compliance are critical both in Latin America and offshore, driving institutions toward e-FX platforms that offer auditability, risk controls, and trusted, regulation-aligned execution environments says Buenaño. “As transparency improves spreads compress, further driving volumes across the region.”

Local banks will be key to the future development of e-FX in the LatAm market, says Buenaño. “Electronic FX platforms are a must for local banks, who are servicing their customers across a variety of technology platforms.  The larger regional banks were first to adopt technology, as they saw their market share become impacted by local global bank affiliates, who were using technology to their advantage.  We now see the mid-size banks adoption of technology at a rapid pace, as to not lose ground” says Buenaño. “At this stage the model has flipped entirely, as the local players are now the ones pricing global players for their currency products, removing middlemen and marketing to global end users directly.  These banks have the local market knowledge, books of business, and now the advanced technology that focuses solely on localized data sets, used to service the broader global community demand.”

Fintech companies are leading the charge in the transformation of electronic markets, says Buenaño. “The development of sophisticated technology that enable local banks not just to compete with global technology, but surpass it, is expensive and time consuming to deliver.   Utilizing a hybrid approach that applies vendor lead newly developed sophisticated technology stacks with local market know how, systems and regulations adherence and customizations has been the method of choice, making adoption both rapid and cost effective.” 

As already mentioned, next generation technologies like AI and ML are also playing their part in the development of the e-FX market and the demographic change has led to a younger tech savy set of traders and banking professionals who have quickly taken the application of AI to predictive pricing strategies, says Buenaño.  “While most are still not fully integrated into the trade flows, they are broadly used as an input to traders for their pricing and hedging strategies.  As the AI models continue to be refined, it wont be long before they play a greater role in reducing risk that leads to better pricing for all.”

But while fintech is flourishing across the region, institutional investor interest in digital assets is modest at present. “There has been limited requests for digital assets by local banks”, says Buenaño. “As infrastructure matures, and institutions increasingly view digital assets as a credible, institutional interest in digital assets will likely rise across Latin America, driven by inflation hedging needs, currency volatility, and demand of traditional FX and treasury markets.”

When it comes to the prospects for further digitalisation of FX services, Buenaño says, “We see further adoptions across all FX services advancing quickly in many underserved countries, including Central America, and countries such as Uruguay, Bolivia and Paraguay.  Leading the charge is Argentina, with local players rapidly adopting technology in anticipation of the opening of ARS NDF trading globally.  The A3 future exchange is already a fully electronic market, which will drive local banks to apply technology to drive their FX business both onshore along with the global participants offshore.”

Payment services demand

Demand for e-FX services in Latin America has increased along with the widespread use of mobile/smart phones and much better access to internet, says Jeffrey Angard, CEO Americas, Crown Agents Bank.

“Family support in the form of remittances, a significant portion of the population working in the informal economy, and the push for automation have fuelled the demand for cross-border money transfers in the region. A large portion of adults in Latin America still don’t have access to traditional banking services, which creates a huge opportunity for payment service providers, through the use of technological advancements to facilitate access to financial value storage alternatives,” says Angard. 

Demographic changes and increased financial inclusion have also impacted the growth of electronic FX trading across Latin America. “Financial inclusion has come hand-in-hand with an increase in ownership of traditional bank and e-wallet accounts,” says Angard. “People have become much more educated and comfortable with digital and paperless solutions. Many highly restricted markets in the region have adopted the use of stablecoins to access hard currency. In some extreme cases, erosion of currency value through sustained devaluations and persistent bank note redenominations have increased demand for electronic money transfers. The use of electronic payment points has exploded in the region, and it is hardly unusual to see commercial transactions take place with the use of credit cards and mobile phones as opposed to cash/bank notes,” says Angard.

There are, however, a number of FX-related risks involved in money transfer services in the region. “Volatility in some of the LatAm currency pairs remains relatively high, and settlement delays may result in unavoidable price conversion adjustments. Some of these delays may be due to higher convertibility restrictions and complex regulations, capital controls or compliance checks by payment providers and any of the intermediaries along the cross-border journey which is why it is so critical to select reliable payment processing partners.”

Technology and e-FX services will be instrumental in solving these challenges, says Angard. “Technological advancements have resulted in better price discovery and price transparency and e-FX services have significantly shorted potential settlement delays. The use of AI now offers a much speedier solution for Anti Money Laundering and potential Terrorist Financing challenges. It will also reduce the need for manual processes and reduce or eliminate technological gaps along the payment’s journey,” says Angard.

The prospects are incredibly strong for further digitalisation of FX services, including cross-border payments in underserved Latin American countries, states Angard. “Technological progress has lowered barriers for new fintechs to surface in the marketplace. Governments across the region have become more supportive of electronic rails and clearing services. The digitalization of FX services has undoubtedly improved access to wealth storage and wealth transfer mechanisms, but capital controls and complex regulatory burdens will continue to provide challenges. Working with the right FX payment partner will be key to reduce the surprise element, increase the chances for a timely delivery and minimize friction in the delivery process,” says Angard.