Among large institutions in Australasia, e-trading is now fully embedded with 92% of all FX volumes traded through e-platforms. According to research from Sydney based Peter Lee Associates, the largest 66 funds, non-price making banks and Asian banks traded a total volume of AUD 2.13 trillion in 2018. Of these, nine account for two thirds of this volume (AUD 1.44 trillion). These firms tend to be the most highly regulated and the most attuned to new regulatory and governance standards – of which more later.
Meanwhile among large corporates the picture is rather different, with 64% of them using third party and proprietary platforms. This proportion remained unchanged from 2017 and volume growth was also stalled, begging the question of why this should be?
Peter Lee’s managing director Cameron Peter explains that their research found that, “Of the companies that do not use electronic platforms, 22% plan to start using platforms over the next 12 months, 61% state that they do not plan to use platforms over the next 12 months / 17% don’t know.” The reasons most often given as to why they don’t use platforms are that they “don’t do the number of trades to justify the implementation,” “incompatibility with existing systems” and “compliance issues”. So what are buy-side firms seeking from their platform providers?
The Peter Lee research shows that 90% of platform volume is conducted through multi-bank venues led by 360T (43% by volume), FxAll (32%) and Bloomberg’s FX-Go (15%). Among the bank platforms, ANZ’s is the most widely used. ANZ’s Head of eFX, Markets Australia Paul Scott says, “As the adoption of electronic trading continues to increase throughout the FX market, the buy-side’s understanding and expectations regarding connectivity, venue selection, internalisation rates, global infrastructure and support become increasingly important.”
He adds, “Fragmentation within OTC FX, along with regulatory adherence, has reset buy-side execution expectations from just fill rates to more granular trading analytics focusing on parent/child-order ratio, deal acceptance, adverse selection and market signalling.”
At multibank venue Refinitiv, Gary Latner, the firm’s Senior Transactions Relationship Manager observes, “Simplicity, transparency and certainty are characteristics that would describe some of the demands of our clients when using or executing over our FX venues. The launch of the FX Global Code of Conduct (FXGCC) has seen our clients increase their demands for more specific information.
The life cycle of a trade is now paramount for our clients, both sell-side and buy-side, and knowing they can get this information in real time has made their lives easier. The sell-side has placed a premium on trade surveillance whilst the buy-side is demanding more information on pre-trade analytics as well as transaction cost analysis (TCA). Refinitiv has for example added a binary feed to our data offering, meaning customers can subscribe to 25ms updates on all major currency pairs. This has provided our customers with more certainty with their data analysis.”
It is easy to spot that service providers are in a technology race to be able to offer customers best-in-class capabilities. At ANZ, Scott emphasises the importance of continually upgrading the offering. “As with any e-trading operation, the business is constantly refactoring, rebuilding or in some cases re-designing key aspects of the software or hardware architecture to ensure we maintain performance as well as product enhancements. Specifically, we are looking at our market data distribution and messaging capability to enhance the price construction and product delivery customisation via our own API or the main multi dealer platforms to improve the execution experience.
We are looking to enhance our analytic trading dashboards both for internal and external users, and we are currently rolling out our self-service client algo offering. It is also important to note that ANZ is investing in all forms of liquidity, including forwards, swaps, structured products and transactional banking to provide innovative e-commerce solutions.”
Both ANZ and Refinitiv draw attention to the importance of regulation in driving change. Refinitiv’s Director – Transaction Sales, Australia & New Zealand Daniel Guille comments, “This is definitely true in the Australasian market and has accelerated since the launch of FXGCC. There is now a greater expectation for banks to adhere to the principles of the Code, especially around transparency of order handling, order types, pre-hedging and overall market behaviour. This is described in detail in Principles 9, 10, and 11 of the Code.”
Regulation and technology
The twin drivers of regulation and technology – the former typically requiring greater investment in the latter – are conditioning developments in the Australasian e-FX market. While this is also the case in other developed FX markets and centres around the world, what appears to make Australasia different is its agility. Regulation developed in Europe or the USA is taken on board swiftly and, perhaps, as the market is much smaller in volume terms and in the number of firms affected, does not require buy-in and adoption across such a broad front. It also is worth noting that the Global Code, though developed under the auspices of the Bank of International Settlements, was effectively “made in Australia,” authored as it was by Guy Debelle at the Reserve Bank.
Moreover, innovations in the vibrant and state-supported Fintech area and in the domestic and international payments space are being swiftly embedded in the wider Australasian market. Talking to market participants in the region you get a sense that they are intent on doing far more than playing catch up to other regions, preferring instead to recognise that the practical work of innovating in financial services is necessary, may be even fun, and produces real benefits for customers. A simple on-the-ground example of this is that Australians have the second-highest rate in the world of contactless payment card adoption, after South Korea. They are way ahead of Europe and the US in this area. It’s worth keeping an eye on what is going on the Australasian corner of global financial services generally, as well as in e-FX. Good, innovative things could well come from there which others further afield will be keen to adopt.
Retail FX developments
While the Code and other regulations have clearly taken root in the wholesale market, similar developments are happening in retail FX sector. Rajesh Yohannan is CEO at leading regional provider AxiTrader. He says that regulatory pressure is being felt from overseas and this is having an effect in Australasia even if the regulatory environment is not yet as stringent. “It’s been really interesting to watch what’s been happening in Europe following the introduction of the ESMA regulations. There’s no doubt it’s shaken things up and some businesses are struggling within the new regulatory environment, but in the end the changes are about protecting consumers so that’s to be welcomed. For our part, we’ve seen some drift from clients moving from European based brokers to trade under our Australian license. The obvious next question – and something of a hot topic in the local industry – is whether similar legislation is likely to be brought into Australia. Some people say it won’t happen, others are convinced something will be in place within months. I don’t doubt there would be challenges if there was to be a significant regulatory change, but there’s no point resisting them. It’s far more constructive to try and embrace new opportunities that change creates.”
At the same time Mr. Yohannan notes that there has been a significant trend in the retail sector towards “traditionally safe currency products” such as the Euro, Sterling and Yen, as well as key commodities like gold. Retail customers are also looking for “basic things like trust, transparency and regulation [that] never lose their importance,” he says.
“People simply want to know that a business they’re dealing with is reputable and accountable and that if something goes wrong they’re not going to be left out in the cold. That’s why we’re investing so much time, effort and expense in obtaining new licenses around the world. On the other side, new technology is also really important to staying relevant.Traders are always looking for any kind of edge and some of the new platforms and software being developed is really impressive. We’ve chosen to partner with the PsyQuation analytics platform and it’s returning some incredible results for retail traders.”
In addition, he notes that mobile and social trading uptake has been high. Unsurprisingly, technology is as important to retail traders as it is to the wholesale market.
Sydney: Renminbi hub
“Australian corporates have driven the adoption of RMB,” explains Michael Moon, SWIFT’s Head of Payments Markets, Asia Pacific.
He goes on to say that the rapid expansion of Australian companies into Asia, has led to major Australian banks establishing regional offices in markets such as Hong Kong, Singapore and China in order to better support their customers. “Initially, the usage of RMB was driven by one-way settlement of imported goods from Chinese suppliers. Over time, the changes made to China’s regulatory policy on trade and the increased number of Australian companies operating within China, have led to a larger demand for structured trade finance, discounting documentary letters of credit and trade advances denominated in RMB.”
According to SWIFT’s RMB Tracker publication, the Sydney RMB offshore centre, launched in 2015 is today the eighth largest in the world and accounts for just over 1% of global offshore RMB flows.
Meanwhile the ASX RMB Settlement Service allows payments initiated in Australia to be settled domestically through ASX’s Austraclear settlement platform in just seconds, and to and from Hong Kong and China within minutes. In the financial year 2017/18 RMB 6 billion was settled through the ASX RMB Settlement Service.
While the AUD is used in 31% by value of Australian payments to either Mainland China or Hong Kong, the RMB accounts for 14% of total payments by value and seems likely to grow year on year, according to Michael Moon.
“RMB settlement through ASX should increase in the future with new banks joining the service and using it for RMB cross border payments. Users of the service will be able to link up to SWIFT’s Global Payment Innovation (gpi) and SWIFT messaging is used for the transactional link between ASX and the Bank of China (Sydney) as well as for the messaging interface for Austraclear participants. The Austraclear platform has been able to pass on the gpi unique end-to-end transaction reference (UETR) information from November 2018.”
Fintech disrupting traditional financial services
In 2016 the Australian Government led by Prime Minister Malcolm Turnbull formed the Fintech Advisory Group. Its role was to advise the Treasury and regulators following an announcement that Fintech was to be a national priority. This led to the formation of Fintech Australia whose vision is “to make Australia one of the world’s leading markets for Fintech innovation, adoption and investment.”
Although there are Fintechs that are not members, Fintech Australia represents more 250 members that form what it terms its “ecosystem.” Research carried out in July 2017 by KPMG entitled Scaling the Fintech Opportunity: for Sydney & Australia found that there were 579 fintech companies employing 10,000 staff and that by 2016 it had sourced USD675m in invested capital.
While placing itself beside fintech centres like Silicon Valley and London, Australia seems some way down the curve, in October last year it was able to boast seven of the top 100 global Fintech firms in KPMG’s Fintech 100 report, with only the USA, UK and China ahead of it in the world-wide country rankings. Among these was Airwallex, an FX and international payments platform and Agridigital, a cloud-based commodity management tool.
These highlights indicate how Fintech is set to shake up traditional financial services in Australasia as in other regions. Moreover the regulators are fully engaged. ASIC established its Innovation Hub in 2015 to provide support, advice and co-working spaces for fintech start-ups.
Its website reports, “The Innovation Hub has worked on 100 matters relating to 76 entities. Most of these entities have proposed roboadvice, marketplace lending, crowd funding, payments or other credit business models. Some businesses are looking at Blockchain technology opportunities.”
It looks likely that some more Fintech developments will pull through into the e-FX market sooner or later, so watch this space.
Regulation – the view from the RBA
According to Reserve Bank of Australia (RBA) Deputy Governor Guy Debelle, the larger Australian banks were early adopters of the FX Global Code. They were also involved in the process of drafting it. He points out that the Australian Securities and Investments Commission’s (ASIC) expectations for FX market participants in Australia have been relevant as well. The RBA’s own FX counterparties have signed the Code’s Statements of Commitment and this included both Australian and foreign banks.
The buy-side proved a little less plain sailing. “It was expected that the take up from the buy-side would be slower and more difficult to achieve than for the sell-side,” says Debelle. “This has proven to be the case, not only in Australia, but globally. The GFXC has established a Working Group to focus on getting greater buy-side adoption of the Code in the year ahead. Clarifying how the Code is applicable to buy-side firms will be an important part of that. In addition to getting the buy-side to adopt the Code, it’s important that the buy-side uses the Code to hold the sell-side and other service providers to account. For example, the Code frequently stresses the importance of making the appropriate disclosures to clients. While a lot of market participants have amended/expanded their disclosure statements since the Code was introduced, more could probably be done in this area. Strengthening disclosures is the focus for a separate GXFC Working Group.”
Cross border payments
A year ago Australia launched its New Payments Platform (NPP) for domestic real time payments. It was developed by 12 local financial institutions together with the Reserve Bank, with SWIFT designing and building the system. This, according to SWIFT, “…vaults Australia into a leading position globally for real-time consumer, business and government payments.” On the international side, all of the big four banks – ANZ, Commonwealth Bank, National Australia Bank (NAB) and Westpac - have adopted SWIFT’s Global Payment Innovation (gpi). The big news announced last October is that SWIFT has successfully connected gpi to NPP and other domestic payment networks in China, Thailand and Singapore. “The trial successfully demonstrated that by enabling gpi in real-time domestic systems, payments can be effected almost instantly, even when they involve domestic settlement and non-gpi banks,” SWIFT reported.
The implications of this pilot project could be significant for virtually real time global payments. The data connected to such payments is richer than previously, eradicating many of the historical application problems encountered with cross-border payments. SWIFT also reported that the fastest payment made directly between gpi banks in the trial was initiated from a bank in Singapore and credited to a bank account at an Australian bank within nine seconds. “In effect,” it said, “this is already a live, real-time cross-border payment.”
NAB’s General Manager Payments, Paul Franklin said of the trial, “It has given us an opportunity to show that our 24/7 clearing capability through NPP can be used to process international payments to other banks outside traditional real time gross settlement (RTGS) business hours.
This offers the potential for much later cut-off times, which is especially useful for payments originated in Asian time- zones. The success of this pilot has come from the combined effort of the participating banks, and a mutual desire to deliver a better payment experience for customers.”