Nicholas Pratt
Nicholas Pratt

MENA A growing FX market with increased levels of e-trading

Nicholas Pratt examines the emergence of exchange-based and OTC trading, the fledgling crypto market and various regional fintech initiatives which are all helping to boost the FX market and increase demand for electronic trading services across the Middle East and North Africa

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Mohammed Isbeer

“Brokers in MENA recorded very high volumes and large numbers of newly-funded accounts in March and April. This wave is still going and there no signs of it slowing down...”

The FX market in the Middle East and North African (Mena) market has been gradually growing for some time now.  Furthermore, the rate of growth is accelerating, helped by a fall in oil prices which has seen the various countries in the region ramp up their efforts to diversify away from oil-based revenues. 

A key part of that effort is to create more diversified and active securities markets and to attract more international investors to the region. Both of these developments have contributed to the growth of FX trading. And once you add in the region’s focus on financial technology, the market and demand for electronic FX trading is ripe for further growth.

One of the biggest influences on the development of the region’s FX market has been regulation, says Mohammed Isbeer, global head of brokerage sales at UAE-based FX prime broker Equiti Group. Over the last 20 years, unscrupulous activity from unregulated brokers led several governments in the region to ban FX brokerages, forcing the rule-abiding brokers to seek regulation outside the region, typically in the UK or Cyprus.

However, in the last decade, some regulators started to appear, says Isbeer. “The first ones were in Kuwait and Lebanon. Then Dubai took the lead with its central bank license and the Dubai International Financial Centre became a hub for FX companies in the Middle East. Recently Jordan also launched an FX licensing scheme,” says Isbeer.

“This opened the door for Middle Eastern companies to ‘come home’ and operate from the region, and at the same time many international brokers took the opportunity to expand their business in this lucrative region. It has become one of the most competitive regions in the world for FX brokers,” he adds. 

“As a result, volumes in the Middle East have been consistently increasing as investors’ confidence in the sector grows. The more confidence they have, the more they are willing to deposit and trade. MENA remains a very ‘face to face’ market, so firms with local presence have definitely induced more volume and increased their client bases across the region.”

Another big influence in the growth of FX in the region has been the sovereign wealth funds that dominate the investment market. The likes of Mubadala in the UAE, the Qatar Investment Authority, and the Public Investment Forum (PIF) in Saudi Arabia, have all become big international investors, buying up trophy assets in the US and Europe.

These investments have intensified in recent months as a result of Covid 19. For example, the PIF has targeted assets it believes are undervalued as a result of the pandemic, such as cruise operator Carnival. Meanwhile Mubadala and the QIA are both investing in the healthcare technology. 

Both strategies from these cash rich wealth funds require significant FX transactions that cover a range of currencies beyond the G10 staples. 

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Bruno Guillome

“We believe we will see the full spectrum of FX trading services and products available on an electronic platform between 2021 and 2023.”

Covid 19

The FX market in Mena has been gathering pace over the last few years, with investor appetite significantly increasing says Les Male, chief executive of the Dubai Gold and Commodities Exchange (DGCX). “Previously FX was not widely recognised as an asset class in the same way that equities and commodities were, but this view has certainly shifted and we’re seeing the market evolving and maturing.”

But the single biggest factor influencing currency flows of late has been the “tremors of uncertainty” caused by the Covid 19 virus, says Male. This has been reflected in the trading across the DGCX’s G6 currencies portfolio which has recorded year-to-date volume of growth of 456.69% compared to the same period last year. “The last few months have been truly extraordinary – a situation that has never been witnessed before,” says Male. 

The pandemic has had a big impact in the Middle East, agrees Equiti’s Isbeer, while noting that the response has varied across the region. “In some places full lockdowns were introduced, with even banking affected, while others were less strict in their approach. For a short period of time it seemed the flow of funds would be affected and investor appetite would diminish, but that wasn’t what happened,” he says. 

With Covid-related market volatility and with many people locked down in their homes, there has been more interest in trading FX and CFDs, says Isbeer. “Investors kept trying to send funds and trade, so eventually banking systems went back to full function faster than expected, and volumes during the crisis skyrocketed. 

“Brokers in MENA recorded very high volumes and large numbers of newly-funded accounts in March and April. This wave is still going and there no signs of it slowing down, so while a lot of businesses have suffered due to the crisis, FX brokers have thrived.”

Electronic trading

While the size of the market may vary from one Mena country to another, all the banks appreciate the growing importance of electronic FX, says Bruno Guillome, head of sales Mena for 360T, the FX trading arm of Deutsche Boerse. “They understand that e-FX is the way forward and voice trading will diminish in the spot trading market.”

Consequently there is much greater interest from local banks in pricing engines and  trading platforms offered on a white-labelled basis by the likes of 360T. “It has become a major topic. The banks realise they need a proper electronic pricing engine to access and distribute liquidity across all their channels as well their own FX Trading platforms,” says Guillome. “And many of them believe it is easier to use a white-labelled platform than develop their own.”

There is still a fair amount of manual intervention in the FX trading process, something which banks are looking to streamline. They are also looking to serve all their various customers – retail, institutional and corporate – through one platform and one pricing engine which will require a centralised risk management process. 

“FX requests can be hedged directly into the market rather than using an indicative price with wide spreads to protect their pricing models until the next day,” says Guillome. “So greater use of technology will be good for the client through better pricing and better for the banks because they can automate the vanilla products and concentrate on selling more complex FX products.”

Guillome believes that greater use of electronic trading platforms and algorithms will be the major trend in the region’s FX market over the next few years. “As banks get more confident in FX, there will be a push to use algos more and to explore more complex strategies,” he says. He also expects to see a greater use of non-disclosed trading whereby banks are enacting with a single counterparty such as a prime broker rather than the entire market,” says Guillome.

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Les Male

“Previously FX was not widely recognised as an asset class in the same way that equities and commodities were, but this view has certainly shifted and we’re seeing the market evolving and maturing.”

“We believe we will see the full spectrum of FX trading services and products available on an electronic platform between 2021 and 2023. This will create a more efficient market, especially in terms of non-disclosed trading but it will also make it even more important that banks are properly able to manage their risks and set proper limits.”

The growth of electronic trading in the region’s FX market is also likely to attract more buy-side investors, says Equiti’s Isbeer and not just as FX traders but as investors in the brokers themselves. “While FX is considered an online business, given the times we are in and how well brokers have done during the Covid crisis, I am sure a lot of buy-side firms are now taking a closer look at several companies,” he says.

“I would say we are still a few years away from major acquisitions, but interest has definitely started, and conversations now are being had about business models and the stability of revenues and risk-reward ratios,” says Isbeer. 

“A big part of it is also for brokers to start working on building their own technology and investing more in their infrastructure and pricing engines, which will push their valuations higher. For the time being, I think we are looking at an industry that is moving in the right direction in the region and that only needs some more time to build stability and resilience.”

Exchange-based FX in Mena:

One feature of the Mena FX market is the prominence of the exchange-based trading. Execution venues such as the Dubai Gold and Commodities Exchange (DGCX) have been especially active in their efforts to encourage more FX activity in the region. In July, the DGCX introduced new rolling FX future contracts which involve three currency pairs – euro, pound sterling and Australian dollar against the US dollar (USD) in a bid to attract institutional investors to its platform. 

And earlier this month the DGCX also expanded its portfolio of Indian Rupee (INR) Futures Contracts with the introduction of a Weekly INR Futures Contract against the US dollar (USD). 

“Not only do the contracts offer investors greater access to international currency markets with clear, understandable regulations, but the perpetual open nature of them will also provide them with unique opportunities to more efficiently hedge their risk exposure,” said Les Male, chief executive at DGCX. 

“The contracts are suitable for all traders, but will offer especially great value to institutional investors, providing protection against swings in foreign exchange rates, particularly during this period of heightened volatility,” added Male. 

The DGCX has also forged greater links with international markets in a bid to widen its liquidity pool – a development that should also create more interest in FX trading. In 2019 it partnered with market data firm McKay Brothers International to create a low latency link to major US and EU trading hubs. And in May, the exchange was listed as a third country venue by the European Securities and Markets Authority. Male described this as a “significant milestone for both the DGCX and the UAE” that underpins continued efforts to align with international standards and will make the DGCX more accessible to European investors. 

Male says that the exchange is not yet developing a cryptocurrency offering, noting that there is still not a regulatory framework in place in the UAE. However, he says, the DGCX is “a member-led exchange” and “once there is a clear methodology laid out, and if our market participants demand it, then we will look to introduce crypto as a new asset class in the future”.

Blockchain is also something that the DGCX is currently examining more closely, says Male. “We believe blockchain can offer enormous value as it has the potential to speed-up financial transactions and settle them in real-time. However, he adds that a few questions remain and while the existing technology is proven, if blockchain is to successfully displace it, “it can’t be just as good, it has to be hugely superior”. 

DGCX has been especially active in their efforts to encourage more FX activity in the region

Crypto market in Mena

The treatment of cryptocurrencies across the Mena region is somewhat polarised with some states outlawing all forms of digital asset services while others are positively embracing crypto markets and are competing to become the de facto crypto hub in the region. 

In the conservative camp are the likes of Qatar. In January 2020, the Qatar Financial Regulatory Authority announced a ban on all digital assets, prohibiting all Qatari citizens from trading any alternative to traditional fiat currencies or “anything of value that acts as a substitute for currency that can be digitally traded or transferred and can be used as payment or investment purposes”. 

Meanwhile, Saudi Arabia and the UAE, the two biggest markets in the region, have been much more bullish on cryptocurrencies, even launching a common digital currency, Aber, for cross-border payments between the two states which was developed by the two central banks – the Saudi Arabian Monetary Authority and the United Arab Emirates Central Bank. 

But just as regulation is increasing in the traditional FX market, so there is a concerted effort to ensure that any cryptocurrencies are regulated from the outset. A report from blockchain company INVAO highlighted the potential significance of a regulatory framework for cryptocurrency in the UAE which was issued in draft form in 2019 and is set to be introduced at some point in 2020.  

According to blockchain company Invao’s managing partner Ahmed Jacob, crypto-friendly regulations that can create legal certainty will be key to the industry’s future development and encouraging businesses and institutional investors to come to the region.

“UAE-based institutional investors, in particular family offices, are becoming increasingly interested in crypto-markets,” says Jacob. “The key argument for institutions to get involved is that digital currencies are uncorrelated to other asset classes, making them a perfect tool for portfolio diversification”.

Adoption among retail investors in the region may still take some time given that there is a traditional preference for real assets, hence the popularity of real estate and commodities like gold rather than the more esoteric financial instruments or even the traditional spot FX market.

Aside from the central bank-driven efforts to develop cryptocurrencies, there are also a number of crypto exchanges in the region currently in pre-launch status and busy securing venture capital funding while they wait for regulatory approval. 

MidChains is a digital trading platform based in Abu Dhabi that recently completed its second round of financing. Meanwhile another Abu Dhabi-based venture, Arabian Bourse has received in-principal approval from the Financial Services Regulatory Authority of Abu Dhabi Global Markets to act as a crypto asset exchange and custodian. 

Aber - The Common Digital Currency project launched by SAMA and UAECB

Fintech initiatives

Whereas the enthusiasm for cryptocurrencies varies among governments in the Middle East, the appetite for fintech is universally high. 

The plunge in oil prices have accelerated governments’ plans to diversify away from oil-based revenues – none more so than Saudi Arabia where crown prince Mohammed Bin Salman has prioritised fintech as a central plank of his Vision 2030 economic reform plan. “The Financial Sector Development Program’s (FSDP’s) role is to create a diversified and effective financial services sector to support the development of the national economy, diversify its sources of income, and stimulate savings, finance, and investment,” it states. 

“The FSDP will achieve this ambition by enabling financial institutions to support private sector growth, ensuring the formation of an advanced capital market, and promoting and enabling financial planning, without impeding the strategic objectives intended to maintain the financial services sector’s stability.”

As part of the FDSP, the Saudi Arabian Monetary Authority launched Fintech Saudi, to help identify and develop local fintechs, and also established a regulatory sandbox which invites both local and international fintechs to test their products in a ‘live’ environment. While many of these are focused on the payments sector, there are some FX-related ventures. Companies include Manafa Capital, Funding Souq, Circles, Nayifat Finance and Sahlah. 

Regulatory sandboxes are also prominent elsewhere in the Mena market. The Dubai Financial Services Authority has its own sandbox – the Innovation Testing Licence. Established in 2017, the ITL has accepted 25 companies into its cohort process and is currently taking applications to its 2020 Summer cohort. In addition, the UAE has launched Fintech Hive, a $100 million fund to act as an accelerator for local startups.

Meanwhile, the Central Bank of the UAE and Abu Dhabi Global Market has launched the 2020 edition of the FinTech Abu Dhabi Innovation Challenge which it describes it as “one of the flagship initiatives… to recruit innovative FinTech solutions that address specific challenges in the financial services sector”.

Many of the sovereign wealth funds that dominate the region’s investment market have similarly targeted fintech. Egypt’s venture capital market is on the rise. A recent report from Egypt’s Information Technology Industry Development Agency found that Egypt remains the number one place in the Mena region for funding and venture deals in the first quarter of 2020, accounting for 37% of the deals in the region. The report also referenced the Central Bank of Egypt’s plan to invest $6.35 billion in the domestic fintech sector.

The Saudi Arabian Monetary Authority launched Fintech Saudi with the objective to make Saudi Arabia a pioneer in the Financial Technology sector

Retail FX trading in Mena

Retail FX volumes in the Mena market have grown as a result of both international and regional trends. Firstly there is greater awareness of FX as an asset class among retail traders in the Middle East just as there is elsewhere. Similarly, the Middle East has not been immune to the low yield environment that has pushed investors into FX and away from the likes of equities and bonds. 

The location of the Middle East and its time zones have also been a big influence in the growth of retail FX trading, says 360T’s Guillome in that it gives participants access to all the major FX markets from the US and the UK to Asia as well. 

“The fact that the Middle East is located between Asia and Europe has made it more accessible to retail investors. They see it as a more democratic asset class than perhaps equities or bonds,” says Guillome. 

Local banks have realised this and are promoting FX trading to their customers in a bid to rival the likes of Saxo bank and other multi-asset trading platforms with an international reach. But the local banks will have to compete in an increasingly crowded marketplace, especially in markets such as Dubai which welcome more new FX brokers on an almost monthly basis. 

When it comes to the evolution of the retail FX market and the choice of investors in terms of platforms and instruments to trade, it remains very MT4 focused, says Equiti’s Isbeer. “This is where the majority of business is still concentrated and clients are happy with it. Some brokers have introduced different mobile apps or web-based solutions, and they do get traction, but nothing compared to MT4 desktop and mobile apps. In terms of the instruments, these come in waves. While FX and metals were the highest-traded in the last five years, now interest is shifting towards contracts for difference, whether on oil, or US and EU indices, and the volume has been mainly concentrated in these,” concludes Isbeer.

The location of MENA and its time zones have been a big influence in the growth of retail FX trading