Progressive concentration - The Singapore e-FX growth story continues

The Singapore dollar has been one of the fastest growing emerging market currencies of the last 20 years. When the Bank for International Settlements first started tracking foreign exchange flows in 1989, the currency only traded roughly $2 billion in average daily volume.

Fast forward to the latest triennial survey published in 2019, and that figure now stands at $119 billion - above other emerging market currencies such as the Russian rouble, the Indian rupee and the Mexican peso. 

Not only has the trading of its currency grown, but Singapore as an FX hub has also become an important part of the market infrastructure across the globe. According to the same BIS survey, Singapore is now the third largest trading area for FX globally, behind New York and London.  There is on average $640 billion per day of the $8.3 trillion traded globally in Singapore. This is above the likes of Japan, which it surged ahead of in 2013, as well as Hong Kong. 

Growth in e-FX

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Trent Beacroft

“...an increasing number of large FX market participants look to make Singapore their hub for Asia-Pacific trading in 2021 and beyond.”

The rise in e-FX trading has helped cement Singapore’s presence in the region, too.

Asia has historically had numerous trading centers operating in the same time zone, including Sydney, Tokyo, Hong Kong and Singapore, which has been inefficient and costly. Electronic trading has changed that, and market participants have been able to consolidate their trading desks into a single location in the Asia-Pacific region.

“Typically, that location will be where business conditions are most favorable. Many of the world’s major banks have always had a presence in Singapore. From here they have managed their global and regional currency risk. It therefore makes sense for many of these banks to put their e-Pricing engines in Singapore, a place where they have a critical mass of infrastructure, staff and resources,” says Trent Beacroft, CEO of Euronext Markets Singapore Pte. 

As well as its geographical location, the country has also emerged as a major player in commodities trading which has aided its growth in FX business. 

“Singapore is well positioned in terms of geographical location as it is almost on the equator. In our time zone, we will overlap with Australia, New Zealand, Hong Kong, China, Japan and India. Singapore sits physically right in the middle of all these countries,” says Jason Wang, chief operating officer at Spark Systems, an e-FX technology provider.  “Also, Singapore is already the commodities trading hub, with many exchanges offering POP access. The IT backbone and infrastructure is also mature and established, with many global providers present in Singapore,” he adds. 

Euronext Markets Singapore operates a matching engine locally for spot FX, precious metals and non – deliverable forwards under an MAS- RMO licence, It launched its Singapore matching engine in late 2019 which has contributed to steady growth.“Euronext FX has been able to attract both major global tier 1 market participants as well as local onshore names who are now being drawn to the third largest global FX center,” says Beacroft. “This trend is set to continue as an increasing number of large FX market participants look to make Singapore their hub for Asia-Pacific trading in 2021 and beyond. To add to this is a strong financial regulatory environment which attracts market participants,” he adds.

Ravinder Kaur, Institutional Sales Manager at IG Prime, a global leader in online trading, trusted by institutional clients since 2006 believes continued building of matching engines in Singapore will also add to the growth in e-FX trading. “With the rising popularity of a new Forex Trading Engine in Singapore, the growth will continue to be on an upward trend as this would remove a lag caused by routing trades through London or Tokyo,” she says.

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Tod Van Name

“By creating a regional hub for price distribution and consumption, providers in Singapore are leveraging technology to improve execution results and performance.”

Other factors at play

There are other factors contributing to the rise in e-FX trading in Singapore. These include pre-and post-Covid economic growth, shifting global trade policy, volatile commodities markets and the strength of regional banking. Price latency in the region and the potentially fragmented market landscape has also encouraged firms to centralise activity in one trading area. 

“Given the geographically diverse and fragmented nature of FX liquidity provision, Asia is susceptible to price latency. By creating a regional hub for price distribution and consumption, providers in Singapore are leveraging technology to improve execution results and performance,” says Tod Van Name, global head of foreign exchange electronic trading, FXGO at Bloomberg. Further, Singapore is already a dominant regional hub for investment managers and corporations. Yet to effectively aggregate this demand, regional banks and brokers must be enabled with the right e-FX trading technology and be able to implement the right digital frameworks to optimally serve customer needs.

Concurrently, the demand for liquidity must be met via effective trading infrastructure. Many of the leading e-FX market makers have made a public commitment to build local pricing engine infrastructure in the region. This has meant Singapore has become an attractive proposition for institutions seeking better price discovery, execution quality, improved latency, and enhanced liquidity in the Asia time zone.

“Platform providers, like Integral, can facilitate both areas of the proposition. We offer regional banks and brokers the full suite of sophisticated workflow management and advanced trading technology needed to compete, including bespoke pricing engines, and optimally serve their local corporate and institutional customers,” says Vikas Srivastava, Chief Revenue Officer at Integral.

“We also operate an ECN and far-reaching liquidity networks that offer local participants seamless connectivity to valuable liquidity sources. Our trading environment ensures the highest level of execution quality, and our data science and analytic capabilities allow participants to demonstrate and prove best execution,” he adds.  

Listed products

For exchanges like the Singapore Exchange (SGX), the growth in e-FX trading has been a boon for listed products like futures and options.

As of the end of May 2021, FX futures traded at SGX were up 2% year-on-year with a notional value of US$123.3 billion, while open interest in the contracts was up 26.3% to 172,389 contracts with a notional value of US$11.7 billion. 

“We continue to support the FX ecosystem and clients in achieving greater capital efficiencies and greater ease in managing their portfolios, by growing, enhancing and diversifying our FX offerings including our suite of full-size and mini FX futures contracts, FX options and FlexC contracts,” says KC Lam, head of rates and FX at SGX. 

The exchange has been touting the benefits of its listed products versus over-the-counter equivalents, and believes with global regulatory initiatives such as Basel III and MIFID II coming into play, financial institutions are facing an increasing burden of capital requirements. These include uncleared margin rules (UMR) and the standardized approach for counterparty credit risk (SA-CCR) under Basel III.

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Singapore is well positioned in terms of geographical location

“Exchange-listed futures offer similar netting and clearing benefits, and have a more efficient format in terms of initial margin (IM) cost compared to cleared NDFs – a cleared FX futures contract attracts a one-day margin risk compared to five days for cleared NDF,” says Lam. 

But SGX has adopted a policy of working with the OTC market in order to give clients more choice about how they trade these products. By working with various FX platforms, it is now possible for NDF traders to view futures in their preferred format, which is accelerating adoption. By allowing both OTC and listed FX trades to be included as part of their trading strategy, traders can choose to pivot liquidity between different venues and realise price efficiencies through various distribution channels.

SGX also introduced FlexC futures in 2019 to allow OTC FX traders to trade listed FX. Unlike most FX futures with fixed expiry dates, FlexC futures allow the trading of FX futures on any fixing date up to 100 calendar days forward, essentially replicating OTC FX trades on a listed venue. “SGX FlexC FX Futures offers a more effective way of mitigating counterparty credit risk while retaining bilateral trading relationships. SGX FlexC FX Futures brings about lower margin costs and capital requirements, facilitates multilateral settlement netting and enhances operational efficiencies,” says Lam. 

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Jason Wang

“Singapore is already the commodities trading hub, with many exchanges offering POP access. The IT backbone and infrastructure is also mature and established,...”

Regulatory changes

One of the biggest factors in e-FX growth in Singapore has been the business-friendly environment set up by the Monetary Authority of Singapore (MAS). This was set out by the MAS’ Financial Services Industry Transformation Roadmap which set out to develop Singapore as the global FX price discovery and liquidity centre in the Asian time zone to better support regional market participants.

As a spokesperson for the MAS notes, there has been a good mix of global and regional FX market participants, including Electronic Communication Networks, global banks, non-bank proprietary trading firms, custodian banks, as well as Singapore’s local banks, have established their e-trading engines and teams in Singapore. Notably, all the top 5 global FX counterparties have set up their FX pricing engines in Singapore to cater to growing regional flows.

“In the next phase of broadening and deepening the FX ecosystem, we will continue to encourage more buy-side participants and platforms to set up their pricing engines in Singapore. Singapore is a trusted and business friendly marketplace, leveraging on our strategic location with superb connectivity to the region. As a key regional hub for trade, financing, asset and wealth management and risk management, Singapore is well-positioned to be a leading regional FX centre,” says the MAS spokesperson. 

“Our stable political environment, strong rule of law, sound regulations, robust infrastructure, as well as the high standards in data security and confidentiality, are other key elements that makes us a trusted FX centre and marketplace,” the spokesperson adds. 

One of the key developments has been the low latency associated with trades executed out of Singapore has greatly reduced orders round-trip timings and trade rejection rates, resulting in better pricing and improved trade execution for market participants.

According to the MAS, some Singapore-based participants that have completed the build out of their e-trading engines in Singapore have reported round-trip timing savings of up to 400 milliseconds by executing orders during the Asian time zone in Singapore instead of other centres. They saw improved trade-fill ratio from around 80% to almost 98%. Many global banks and market participants recognise these commercial benefits and have invested in building their regional pricing and matching engines setup in Singapore, to provide better pricing and trade execution to their clients in the region. The regulator has also consulted with major forex players, encouraging them to build systems in the Southeast Asian nation to reduce the latency caused by routing trades done by regional market participants to other markets.

A further initiative that has helped has been the launch of the FinTech Regulatory Sandbox to enable financial institutions and FinTech players to experiment with innovative financial products or services in a live environment but within a well-defined space and duration. The sandbox will also include appropriate safeguards to contain the consequences of failure and maintain the overall safety and soundness of our financial systems. 

In the FX trading space, Singapore-based start-up for FX options trading, Synoption, was one of the first graduates of MAS Sandbox Express, where it kick-started business as an experiment within the sandbox.  Upon graduation, it has been recognised by MAS as a Recognised Market Operator to continue operating as an organised market. 

“We hope that by incorporating some flexibility into our regulatory regime, it can spur on new innovations to address market needs and keep Singapore’s financial sector competitive,” says the MAS spokesperson.

Attracting the buy side

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KC Lam

“We continue to support the FX ecosystem and clients in achieving greater capital efficiencies and greater ease in managing their portfolios,..”

Trading e-FX today in Singapore encompasses the full gamut of products – from spot, to derivatives and futures – with liquidity ample in all these markets. Given the fertile trading ground available, institutional players have been busy trying to attract clients and the demand for using different technologies in assisting in e-FX trading is rising. 

“There is a clear acknowledgement among buy-side firms that future-proofing derivatives portfolios and managing collateral and liquidity issues should remain high on their agendas. As more buy-side firms adopt new methods such as direct access models, they stand to benefit from improved execution terms, stronger counterparty credit risk management and greater access to liquidity in future crisis situations,” says Ravinder Kaur at IG Prime.

Singapore has many different types of institutions trading FX, so the needs vary. For example, multi-bank platforms are popular with corporate treasuries because of the need for best execution, and credit relationships. Single dealer platforms are popular with regional bank traders as they might have specific needs that only single dealers can provide. ECNs have proved popular with market-maker banks and algorithmic hedge funds.

A number of regulatory initiatives have prompted demand for other products that service the buy side, too. The FX Global Code, which in part sets out how institutions engaging in FX should behave, has a total of 75 buy side and sell side firms in Singapore signed up to it. 

In Singapore, the Singapore Foreign Exchange Market Committee (“SFEMC”), co-chaired by MAS and an industry leader and comprises major FX market participants, is responsible for developing and recommending appropriate industry standards and codes, as well as promoting high standards of professional conduct and competencies in market participants. To promote the adoption of the FX Global Code, the SFEMC has set up a public register where Singapore-based market participants can publish their Statements of Commitment to the FX Global Code. 

These market participants have also reviewed their internal processes against the principles of the Code and taken steps to put the principles to practice. Notably, they have updated client disclosures to provide greater transparency in conducting FX market activities such as making clear to clients that final prices may include mark-ups, and providing an accurate and timely record of orders and transactions executed. 

“Buy-side clients in Singapore seek deep liquidity across a full range of instruments, flexible execution methods, and comprehensive workflows that maximize efficiency while reducing risk and transaction cost. How that is realized is unique to each firm, and one size-fits-all strategies rarely work. Clients demand best of breed solutions at a fair value,” says Tod Van Name at Bloomberg. 

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Singapore is already a dominant regional hub for investment managers and corporations

Key objectives

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Ravinder Kaur

“There is a clear acknowledgement among buy-side firms that future-proofing derivatives portfolios and managing collateral and liquidity issues should remain high on their agendas”

The buy side have several key objectives that they are seeking. Firstly, they have a duty to meet and prove best execution. As a result, they want access to a high-quality EMS, and they also want connectivity to different types of liquidity, ranging from their bank relationships to non-bank market makers. Additionally, they want a trading system that can sit seamlessly with their existing order lifecycle and order management systems. 

“Traders especially appreciate a system that makes their lives easier.  Whether this takes the form of an auto-execution system, embedded API services, accurate prices, low-cost access to trading algos, the right tools to analyse and optimise their business - including TCA, or simply the ability to upload hundreds of orders to net and trade all at once,” says Integral’s Srivastava. 

Demand for multi-bank, single-dealer and ECN platforms in Singapore is largely akin to what market participants have seen in Europe and America, with multi-dealer platforms expected to remain the dominant trading channel in 2021, according to Integral.  Srivastava says the important aspect for institutions in Singapore - and surrounding markets - wanting to trade on MDPs is to have the right technology in place before stepping into the MDP arena. 

“Technology is paramount in this competitive environment, where the fastest price and tightest spread often wins. In this scenario, having the right connection to an MDP, sophisticated auto-pricing capabilities, risk management infrastructure, and the tools to price complex orders becomes vital,” he says.

Single-dealer platforms will also remain a vital part of the infrastructure.  “In the last year, we have signed multiple deals with local banks and brokers seeking sophisticated SDP technology in Singapore. They recognise the necessity to differentiate their offering through tailored pricing, customized UIs, algorithmic trading, and TCA capabilities, to meet the increasingly sophisticated needs and expectations of their institutional and corporate customer base,” says Srivastava.

Euronext has a similar story to tell. “We are seeing strong demand from the Institutional client base. Banks and LPs are also using us to engage clients whom they would normally not have direct access to. Our business in the Asia region has become much more focused on those clients who are looking for low latency and efficient pricing. To follow on from this, clients are also looking for more bespoke solutions to connectivity and liquidity. Instead of doing the heavy lifting around infrastructure many clients are using Euronext FX to assist with this service and using us as a bridge for their relationships,” says Euronext’s Beacroft. 

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Vikas Srivastava

“Technology is paramount in this competitive environment, where the fastest price and tightest spread often wins.”

Digital Currencies

Digital currencies have been a hot topic globally and that is no different in Singapore. The country is fast becoming a crypto trading hub, with many of the major crypto exchanges setting up offices in Singapore, as well as OTC providers such as Cumberland, OSL and QCP. The Singapore central bank is known to be open to adopting blockchain, and also allowing Crypto Exchanges to setup and do their business in Singapore.

“The demand from institutions are definitely increasing, and DBS is one of the first to respond by setting up their own Digital Asset Exchange, to answer to the demand,” says Spark Systems’ Wang. 

From a regulatory perspective, Singapore has taken a proactive approach to cryptocurrencies by introducing the Payment Services Act 2019 (PS Act). Among other things, the PS Act will regulate intermediaries dealing with certain cryptocurrencies, with a particular focus on consumer protection and anti-money laundering. Once it comes into force, it will also provide a stable regulatory licensing and operating framework for cryptocurrency entities, such as cryptocurrency exchanges. “Through Project Ubin, we had the opportunity to collaborate with other central banks, financial institutions and technology firms,” says a spokesperson for MAS. For example, MAS collaborated with the Bank of Canada for one of the phases of the project to demonstrate that cross border, cross currency payment using wholesale CBDC could be achieved without a common platform. 

“We concluded Project Ubin in 2020 having successfully demonstrated that multi-currency payment and settlement across borders could be achieved in real time and at lower risks and costs,” the spokesperson says. 
Since then the industry has moved forward to build upon the success of Project Ubin towards commercial adoption. For example, DBS Bank, JP Morgan and Temasek recently announced the launch of Partior, a joint venture company to create a new blockchain-based platform for payments, trade and foreign exchange settlement, using digitised commercial bank money. 

“As this digital currency has gained momentum, Singapore has emerged as a key hub in Asia with its welcoming attitude towards emerging technologies such as cryptocurrencies and blockchain. The Singapore government has reinforced this perception through its willingness to experiment, with the Monetary Authority of Singapore (MAS) exploring the use of distributed ledger technology for clearing and settling payments and securities, since late 2016,” says Ravinder Kaur.

MAS continues to collaborate with the industry and other central banks on potential applications of wholesale CBDC. For example, it is collaborating with the Bank for International Settlements Innovation Hub and the central banking community to design, develop and test new multi-CBDC models for cross-border settlement. Project Dunbar will explore how different multi-lateral settlement platforms could be designed to link up with each other. 

“To encourage and facilitate open collaboration, we will be publishing our learnings through iterative and periodic publications that is intended to drive discussion and engagement. The first of a series of blog posts was published in April, on the topic of “Multi-CBDCs: Designing a digital currency stack for governability”,” says the MAS spokesperson.