Singapore:  Growth + Technology = Success in eFX
Singapore: Growth + Technology = Success in eFX

Singapore: Growth + Technology = Success in eFX

Singapore is Asia’s leading FX trading centre because it is the sweet spot where regional economic growth meets technology and innovation. Richard Willsher investigates.

First Published: e-Forex Magazine 81 / Regional eFX Perspective / July 2018

MAS is actively encouraging the development of the e-trading ecosystem in Singapore
MAS is actively encouraging the development of the e-trading ecosystem in Singapore

The demands for FX coverage are easy to see. The island state is a trading hub for commodities such as iron ore, rubber, fuel oil, natural gas and freight. It’s a major port and transhipment location. Singapore is also surrounded by rapidly emerging and / or commodity rich Asian countries and is at the crossroad between the huge consumer markets of China and India from the Middle East, Europe, East Coast North America and Australia. Add to this the presence of the regional treasury headquarters of many multinational corporations such as Lenovo, Shell, BMW and Huawei. Then there are trading houses, investment fund managers, equity markets and derivatives capabilities across several asset classes; Singapore has to be the place to provide the infrastructure to meet real money and proprietary FX trading. 

No real surprise then that Singapore appears as the third largest global FX hub after London and New York in the Bank of International Settlement’s Triennial FX Survey in 2013 and 2016. And, importantly, although its USD daily average turnover of USD517 billion in 2016 represented only a 7.9 per cent share of the global market, well behind those of London and New York, that share was a rise of 40 per cent over the previous survey in 2013. 

“Growth in FX activity in Asia has grown strongly over the years,” explains a MAS spokesperson, “because of the rise of Asian economies, which has fuelled demand for Asian FX risk management products. This has caused an expansion in the FX ecosystem in Singapore, including growth of FX teams from global tier one banks, regional banks, and non-bank liquidity providers in Singapore. We have also seen exchanges – SGX and ICE Futures Singapore - offering Asian FX listed derivatives to meet the increasing demand for central counterparty clearing house (CCP) cleared hedging solutions.” 

Michael Go

Michael Go

“Mobile Apps are increasingly being developed across the region for retail / wealth trading and are focused on creating simplicity, accessibility and efficiency for the user.”

Regulation and the FX ecosystem

MAS is actively encouraging the development of the e-trading ecosystem in Singapore and have designed and implemented an incentive program to encourage large banks to move their pricing engines to Singapore.  The set-up of FinTech FX technology firm (in conjunction with a large FX Hedge Fund) Spark Systems, aimed to kick start the connectivity and pricing of liquidity providers locally. ”MAS are keen to cement Singapore’s position as the main Asian hub for FX, and have actively encouraged local institutions to adopt the Global Code of Conduct and in fact appointed the Singapore Foreign Exchange Markets Committee (SFEMC) responsible to promote and encourage adherence to the Code,” says Scott Moffat, Managing Director for Asia Pacific at LMAX Exchange Group, a leading global FCA regulated trading venue for FX.

Jeff Ward

Jeff Ward

“One thing that MAS is keen on and that you might see, is more and more clients putting their trading infrastructure physically located in Singapore.”

The ecosystem works for all kinds of market players. Michael Go, Head of Trading Market Development, Asia Pacific, Thomson Reuters, says that MAS and the Singapore government have both fostered a culture of growth and innovation in the financial markets to ensure they leverage the talent and human capital available for the benefit of the entire trading ecosystem. “Note,” says Go, “that innovation isn’t just in fintech but also in the tax, learning and development, risk and regulatory controls as well as the regtech spheres.”

MAS and the Singapore exchange (SGX) as well as local FX market participants are very much aware of the global nature of FX and have been keen to ensure that Singapore matches up. It enjoys a AAA sovereign rating while SGX was the first exchange in Asia to receive a derivatives clearing organisation (DCO) recognition from the CFTC in the US. It also has equivalence with European Market Infrastructure Regulation (EMIR), enabling it access to all the global market names that may wish to trade derivatives on its platform. 

Underpinning all of this is a stable and predictable legal system based on English law and neutrality.

Liquidity, liquidity, liquidity

Regulation and the FX ecosystem combine to build confidence in the Singapore FX marketplace. Such confidence begets liquidity, the lifeblood of the spot, forwards and derivatives FX segments. All of the leading global players from tier one banks, regionals, non-banks and other sources of liquidity and trading platforms are present. Price discovery is therefore transparent and plentiful. But Singapore is reaching further to establish competitiveness in its markets. 

As yet, much of Singapore’s FX trading is dependent of data centres located in London, New York and sometimes Tokyo, adding delay to trades. MAS, however, is on the case. “For the future,” explains Jeff Ward, head of NEX Markets Asia, “one thing that MAS is keen on and that you might see, is more and more clients putting their trading infrastructure physically located in Singapore. As their franchises grow in Asia, there are pricing gains in that, from system performance, latency, and price discovery particularly in Asian currency pairs. So you will see firms placing not only their traders but their trading infrastructure here. I mean the global players with their big single dealer platforms and the non-bank market makers. There are advantages to pricing Asian clients in Asia rather than from New York or London.”

MAS itself sees this as an important development for the future. “As market volumes and activities increase in Singapore and the region,” says MAS spokesperson. “There is a growing need to enhance the FX infrastructure. We are working closely with industry to build up e-trading infrastructure and capability to improve market transparency and facilitate price discovery of FX trading in the Asian time zone. With this in place, FX players can expect to see better pricing, improved execution, and hence, better risk management,” they state.

RMB Trading Centre – SGX to Launch New Products

KC Lam

KC Lam

“We have a dominant market share of listed CNH derivatives trading across the globe”

From small beginnings, offering a limited range of on-exchange currency pairs in November 2013, SGX is now by far the largest Asian exchange for unencumbered Asian currencies, according to KC Lam, SGX director and head of rates and FX. “We have critical mass. We have a dominant market share of CNH derivatives trading across the globe. As at 23rd May, we were averaging USD1.66 billion a day. We offer also a listed CNY contract which uses on-shore PBOC’s fix. The offshore RMB market however has gravitated towards the CNH product and is widely regarded as the proxy for the movements of the Chinese currency against the USD.”

He points out that the market is expecting USD/CNH to be more volatile and no longer directional as before.  Now, the need for currency hedging in a much more volatile market environment is widely appreciated. Moreover, demand is burgeoning as Chinese imports of plant and equipment for major projects and other goods grow exponentially, and firms trading in RMB denominated contracts are becoming more common.

To meet this demand Mr. Lam is expecting that SGX will launch a suite of new flexible futures at the end of August, to supplement its existing USD/CNH FX futures and options contracts. 

“We are planning to roll out an innovative FX solution in Q3 this year, Lam says. “Developed in consultation with market participants, the solution enables bilateral trades that are privately negotiated with tailored expiration dates to be registered and settled just like the standard FX futures contract. With FX markets moving towards central clearing, this product solution will offer an effective way of enhancing operational efficiencies, lowering costs and counterparty credit risk, while keeping bilateral trading relationships.”
This is against a background of increased risk awareness. “Since the financial crisis everything has changed. The trading environment is very complex. We are trying to help simplify it and make it cost efficient.” 

The latest SGX offering adds further depth to the ever-growing market in CNH hedging tools. It also highlights how Singapore is strengthening its position in the global CNH market. Although what will happen to the offshore RMB market when and if CNH and CNY integrate into one liquid and freely tradable currency remains to be seen, SGX is developing products that match today’s market demand.

Tech application

The first and most obvious use of technology is in single bank, multibank and matching portals. All the e-FX big players are present and have been so for some time. No surprises there but there is so much more going on.

There is plenty of fintech development for example that is being quickly embraced in the marketplace, as Scott Moffat from LMAX Exchange Group explains. “Fintech technologies are heavily involved with the FX market. Cloud technology and blockchain solutions are being leveraged to offer innovative services.
The blockchain start-up community in Singapore is quite diverse and includes companies offering solutions for compliance, security, payments, trading, etc.” 

In FX, SGX has invested in Cobalt, which uses blockchain for FX settlements and trading. R3 is collaborating with MAS to launch a distributed ledger technology (DLT) centre of excellence in Asia. Major local bank OCBC has leveraged expertise from Fintechs and became the first bank in the region to use blockchain technology in its local and cross-border payment services. There are plenty of other examples that illustrate how Fintech and established firms are collaborating. 

XTX Markets builds eFX trading engine in Singapore

Wai Kin Chan

Wai Kin Chan

“With Singapore being the largest FX centre in Asia, we see huge potential in the Asian FX market..”

As part of its expansion in the Asian FX markets, XTX Markets’ Singapore entity (XTX Markets Pte. Ltd. (XTX)) is building a new eFX pricing and trading engine which will go live in Equinix’s Singapore SG1 data centre in June 2018.  XTX believes that this SG1 build-out will enhance the eFX trading experience for XTX’s counterparties in the region and in turn, help increase participation rates and volumes for eFX activity conducted within Singapore to benefit the regional FX market ecosystem. 

Head of distribution for Asia at XTX Markets, Wai Kin Chan, commented: “With Singapore being the largest FX centre in Asia, we see huge potential in the Asian FX market as the uptake in electronic trading and increase in Spot & NDF currencies traded in the region continues.”
 Alan Yeo, Executive Director, Monetary Authority of Singapore (MAS) said, “Under the Financial Services industry transformation map (“ITM”), MAS aims to enhance the e-FX trading infrastructure to improve market transparency and facilitate price discovery of FX trading in the Asian time zone. XTX is an affirmation of our eFX vision and we will continue to work with other global liquidity providers and platforms to grow the ecosystem in Singapore for Asia.” 

Jason Wang

Jason Wang

“The government’s plan is to be the Silicon Valley of the east, to attract talent and also businesses to establish themselves in Singapore. So, the right people in the right place isn’t an accident.”

At Spark Systems, the platform that harnesses advanced technology to increase efficiency between FX liquidity providers and end users, Chief Operations Officer Jason Wang pinpoints the reason for the growth in FX technology. “Singapore is home to quite a number of large international trading houses, like FlowTraders, DRW, Virtu, Millennium Partners and Tower Research. As these guys setup in Singapore to cover the equity markets, trading FX also becomes necessary as a hedge against the Asian currencies. It’s natural that within the trading firm, they’ll impart their equities knowledge to FX. Most notably is the recent adoption of TCA on FX, a concept that’s always been around for equities.”

He also describes the Fintech environment that Singapore is fostering. “The Singapore Government has placed emphasis on Fintech to the extent that they have a team within the Central Bank that looks at Fintech,” he says. “It encourages new start-ups and provides regulatory sandbox for Fintechs to launch their services. This is part of the government’s plan to be the Silicon Valley of the east, to attract talent and also businesses to establish themselves in Singapore. So, the right people in the right place isn’t an accident.”

Similarly, payments system provider SWIFT is among larger, established infrastructure businesses that are eager to reap benefit from working with new technology firms in Singapore. Their focus is on payments technology and security – see panel.

Inevitably, there is increasing demand for mobile FX trading apps. Jason Wang says that as technology matures, and there’s a bigger focus on work-life balance, the need for mobility has driven the demand for mobile apps. “Different from a year ago, there’s been much more demand for mobile trading apps in Singapore,” he says. 

Scott Moffat

Scott Moffat

“The blockchain start-up community in Singapore is quite diverse and includes companies offering solutions for compliance, security, payments, trading, etc.”

Over at Thomson Reuters, Michael Go agrees. “Mobile Apps are increasingly being developed across the region for retail / wealth trading and are focused on creating simplicity, accessibility and efficiency for the user. Institutional users will increasingly rely on mobile apps to monitor risk and positions as well as secured communication.”

Lastly, as Asia-based clients have become more sophisticated, their FX platform providers, whether single or multi bank, have recognised the importance of workflow facilities. NEX, for example through its EBS platforms, has developed a variety of pre-trade, execution and post-trade tools to meet client requirements. And it’s a competitive landscape. “It’s not easy for large customers to change platforms because the workflow is so imbedded in the way they operate,” Jeff Ward explains. “They don’t move to a new platform without significant conviction and seeing that there really is a better mousetrap for them.”  

Fast forward

Those who work in Singapore’s FX marketplace, present an overall impression of its dynamism. There is a sense that this is Singapore’s moment to cement and enhance its position as the major financial centre in Asia. Hong Kong and Shanghai, and to an extent Tokyo, may have other ideas. However, Singapore is keen to preserve its independence and enhance its governance, infrastructure, technology and business-friendliness to encourage global businesses and financial institutions to choose the island state over other rivals.

Mobile FX trading in Singapore

“We have been growing our business in that region and clients in Singapore, Indonesia and Malaysia represent an increasing proportion of our income,” says Paul G Smith, Managing Director of Mobile Trading Partners. “We see the normal mix of usage, retail FX investors use their familiar trading tools and apps, but in Singapore there’s a lot of institutional activity and that changes the focus. Institutional traders are not known for using apps in their work, but Asia is mobile-centric these days and Singapore is no exception to that,” he states. “We are pushing portfolio trading and institutional front ends to clients there, for internal use as well as for clients, and are gaining a large amount of interest. The justification is simple: as the world moves onto mobile, there is no place for “desktop” computer applications any more. Singapore is following the regional trend towards mobile+cloud. The OMS and trading algos have to live in the cloud, where they can keep persistent connections to pricing and trading back ends, and the mobile device is the portal to everything from portfolio management to news-based trading decisions.”

Business growth in ASEAN countries and the wealth it creates are major drivers for Singapore. The centre of gravity for wealth management and related services is shifting eastwards, from London for example. The uncertainty over Britain’s post-Brexit future may well serve Singapore well.
Underscoring Singapore’s rise as a global centre for FX and other asset classes is its willingness to grasp and apply new technology as it develops. And it is light enough on its feet from regulatory and infrastructural standpoints to do so rapidly. 

Add together all of these characteristics and Singapore presents a pretty strong case for being regarded as the go-to location for e-FX Asia and it will be surprising if we don’t see further strong growth in its share of global FX trading in the coming years.

The payment landscape in Singapore is dynamic and needs a payment system that can keep up with it

Laetitia Moncarz

Laetitia Moncarz

“Enhancing the overall security of the payments landscape is an important area of focus for SWIFT,”

SWIFT’s Laetitia Moncarz, director for payments markets, ASEAN notes that the real-time payments landscape in Asia Pacific region is developing very rapidly. Thailand has Promptpay, Malaysia is going to real time this year and Australia, with the support of SWIFT, earlier this year launched the NPP. In Singapore real-time service is available through FAST. Across both domestic and cross-border payments, Singapore has been improving payment speeds for both large corporations and SMEs via FAST and by the Singapore banks offering gpi service.

“Despite this, there is still a general misconception regarding cross-border payments,” explains Ms. Moncarz. “Many of the problems normally associated with cross-border payments today, such as a lack of traceability and delays, are in fact not technology related. Instead, these stem from business process frictions, including compliance, liquidity needs, and reporting requirements.”

SWIFT’s Global Payments Innovation (SWIFTgpi) addresses these issues by offering a secure, transparent, traceable and efficient cross-border payments service. In Singapore, the local real time gross settlement system, MEPS+ is enabled by SWIFT gpi, and not only lets banks send payments instructions but also allows for the tracking of a payment, end-to-end until the beneficiary’s account is credited. Around 50% of the gpi payments are reaching the end beneficiary within 30 minutes.

As in other markets, SWIFT says that it has been working closely with regulators and industry associations to support efficient, reliable and secure electronic payments in the region. “Enhancing the overall security of the payments landscape is an important area of focus for SWIFT.” Ms. Moncarz continues. “The Customer Security Program (CSP) was launched in 2016 to drive awareness of cyber risks and empower the community with tools, services and intelligence to respond to these persistent and sophisticated threats. The program focuses on: The security and protection of customers’ local environments; preventing and detecting fraud in their counterparty relationships; and working together as a community to prevent future cyber attacks. From 1st January 2019, financial institutions that use SWIFT are required to comply with mandatory controls in the SWIFT customer security control framework that establishes a minimum baseline for security. Under the new assurance framework, customers have been required to provide self-attestation of compliance against 16 mandatory controls on an annual basis.”