While New Zealand falls squarely within the Australasian geography and has a small number of significantly sized institutions and corporates, it is the Australian buy-side that promotes much of the demand from the area’s foreign exchange market as a whole.
Defining the buyside, Michael Correa, managing director and global head, corporate and institutional sales and debt capital markets at Westpac, divides the constituency into two main groups, the top 50 corporates who are essentially customers of the banks who borrow money, and the superannuation funds, other institutions, asset managers, central banks, insurance companies and hedge funds who are broadly investors of money. Below these in size of turnover is a layer of medium and smaller sized firms that may also have international dealings and so seek foreign exchange services.
These groups represent the demand side of the picture. The supplyside are the main banks in the region that comprise the large international universal banks and the large and smaller local Australasian banks that handle the bulk AUD and NZD liquidity – though this is changing in character, as we shall see.
In this context technology is underpinning as well as changing the entire market across the region. Corporates of all sizes are focused on achieving greater price transparency which they are achieving with improved market data and competitive tension, according to William Richardson, head of corporate and institutional sales
fixed income and currencies at Macquarie Group.
“Companies that have historically met their FX needs through their transactional bank are receptive to creating an FX panel of both bank and non-bank providers,” he says. “While the growth of multi-bank platforms has been driven in part by the desire for more competitive pricing, some corporates have had to adjust their expectations regarding service levels and proactive engagement on hedging ideas. Some are starting to shift their focus towards getting their strategies right and executing at a price that is reflective of value. Asset managers that we deal with are already close to where the interbank market is trading so are more interested in achieving straight through processing (STP) of trades and allocation of large trades, efficiently across many portfolios or sub-funds.”
Mark McCall, head of electronic trading at National Australia Bank (NAB) reflects a similar viewpoint. “Among the top 100 listed companies we have seen a shift away from traditional phone dealing to multibank electronic execution,” McCall says. “The drivers include ease of execution, access to the best available price, STP and post trade functionality as well as a reduction in operational risk. More recently, those companies outside the top 100, who would typically have smaller treasuries, are seeking similar efficiencies in their FX dealings, but not necessarily within a multibank environment. Local banks are responding with their own single bank offerings. We expect online execution to increase in place of traditional voice execution as banks work with clients to offer execution tools that are cost effective, transparent and reduce operational risk.”
Westpac’s Michael Correa notes that the major corporates have been heavily marketed over the last five years if not longer by the multidealer platforms. He says that in that respect Australia is mature market.
“There shouldn’t be any surprises with the way we operate in Australia as compared with anywhere else in the world. But further to the sub-top 50 group, the middle market, this is where our single dealer platform has had an impact. If you look at the landscape in Australia, there are substantial changes that have been happening over the last two to three years in the upstream and downstream way that finance departments are working on the use of technology. Whether it be accounting systems and the like that have given them a greater visibility or an ability to look at where they can start using single dealer platforms. There is definitely a trend that we are seeing now, that’s occurring within the banks and our clients. It’s evolving but it’s evolving from a marketing tool to an efficiency tool.”
Correa’s colleague and head of financial markets e-commerce Giulio Katis adds, “We provide an end-to-end solution for our customers. It’s targeted for our core banking customers although we do have some non-bank customers who use our portal for FX. It’s all the way through to payments. From the corporate to the commercial and SME segments we offer different solutions. We have not specifically invested in competing with [Deutsche Bank’s] Autobahn or some of the other portals of the major international banks. We’ve deliberately not done that. We felt that there wouldn’t be the value that we were creating for our customers versus what they might already have.”
Tom Robinson, head of sales at MahiFX, the market making technology provider, compares Australasia to Scandinavia, saying the Australian firms invested in technology early on, so are quite advanced generally. There is a high penetration of technology among the population. He says it also helps that it has a reasonably large population but significantly is on the doorstep of greater Asia, particularly of China.
Certainly the large banks in the region see themselves as players in the greater Asian marketplace. For example, Michael Correa, defines Westpac’s activities very clearly. “We’re not a universal bank. At the end of the day we are an Aussie / Kiwi specialist. Our credentials depend on our ability to deliver Aussie / Kiwi. It’s not about trying then to compete for the rest of the G10 or the EM space. It’s not our strategy.”
“We are part of Asia,” says Correa, “so we’ve got an Asian business and that is focusing back to our Aussie core. What we are trying to link into is the people, the trade and the capital flows that operate between Australasia and the rest of Asia. You can’t cover every market in Asia. Our focus is based on China, India, Singapore and Hong Kong where our hubs are. We have a very big presence in Asia and doing very well there. But we are not trying to be all things to everybody in Asia at the same time. We are market makers in the markets where we are present.”
Impact of regulation and OTC derivative reforms
Regulation is also pushing the market towards technology as NAB’s Mark McCall explains, “Regulators are pushing for increasing levels of electronic trading and automation to increase transparency and reduce the potential for the misconduct issues that have affected the industry. Attention is now turning to the detailed behaviour of algorithmic execution and market making systems, which is a positive development to ensure a level playing field for those competing in the best interests of customers. The development of a global code of conduct should clarify the standard to which electronic participants should be held,” he says.
In this regard the Australian Securities and Investments Commission (ASIC) in December last year released Derivative Transaction Rules (Clkatis
earing) 2015 (DTR) providing detail of the mandatory central clearing and reporting of over-the-counter (OTC) derivatives. This represented the last piece of the Australian regulatory authorities’ response to the G-20 commitments to reform the market following the global crisis.
The new rules cover interest rate derivatives denominated in AUD, USD, Euro, GBP and Yen. They include fixed-to-floating swaps, basis swaps, forward rate agreements and overnight index swaps. DTR also defines the domestic and foreign entities that will be subject to mandatory clearing. The rules will take effect on 4th April this year.
Skillsets and new channels
Meanwhile the shift by the banks to new technology does present them with some challenges. With small, specialist, technology companies developing disruptive technologies (see panel) which may enable either competitors or new market entrants to steal a march, the banks face the decision whether to engage in a costly and time consuming build-your-own approach or to buy in the solutions they need. Fortunately however, the banks are finding what might be termed a middle way.
Perhaps the reason for the way Australia has become one of the world’s leading regions for capital market e-commerce innovation is that it is able to easily draw on international technology. For Alex Mackinnon General Manager of leading regional MT4 broker AxiTrader it boils down to personnel. “It comes down to having a highly skilled workforce. We’ve got a lot people that have returned to Australia with a good deal of global experience working in major financial centres, and for large percentages of their careers. Those are the kinds of people you can build your local industry on the back of. When you add that to the overseas talent we can attract, whether they be from a financial or technological background, you end up with a very accomplished and multifaceted workforce. The blend of expertise and experience, combined with an open-minded attitude, puts us in a great position to be able to take our service to the world.”
Macquarie’s approach according to William Richardson is to build its own platform while adding a range of supporting services. “In building our e-FX platform, we were focused on ensuring clients had access to a range of market information and news feeds, analytical tools to assist them with their decision-making process and two-way pricing. Our platform is supported by bespoke currency market analysis, appropriate hedge solutions and tactical trade ideas. In making markets we are agnostic on whether clients are buying or selling.”
Meanwhile a number of sellside firms are exploring new channels through which to deliver their products and services. One of these is Westpac, as Giulio Katis explains: “We expect to follow suit with some other parts of the world with our offerings. In terms of distribution itself or methods of access, there are always new platforms or new ecosystems arriving. So there are a number cloud-based providers and accounting platforms that are plugging in new banking products and services that are more for the middle market than the larger corporate segment. It is unclear what will happen in that middle market space. Mobile is definitely getting a lot of traction among our consumers and our business banking customers. That’s a new delivery channel that we expect to see growth in. FX is a pretty mature market electronically, I guess because it’s global. But fixed income is something where Australia isn’t as electronic as the rest of the world. It will be interested to see at what rate that develops.”
Australian Renminbi hub
The embedded skillsets, scale and sophistication of Australia’s superannuation and funds sectors and the country’s ability to develop wealth management and investment products to meet the increasing demand from Asia’s burgeoning middle class and institutional investors has all strengthened the value proposition for it becoming a leading a Renminbi hub. Sydney has a strong case for being the centre of renminbi related trading activities but it is also looking to work closely with Melbourne to capitalize on the strengths of both centres.
Australian banks are currently focused on providing the full range of services to companies trading with China, including foreign exchange, derivatives products for hedging, trade financing and RMB banking facilities. The major Australian banks are also focused on Australian companies looking to invest in China, and providing assistance to Chinese companies looking to invest directly in Australia. Chinese banks with a presence in Australia are also looking to assist Chinese companies investing there.
He goes on to add that the bank is currently looking at proof of concept tie-up with Ripple, the global settlement network. “A typical user,” explains Katis, “might be a migrant that wants to send a few hundred dollars overseas and the fees are traditionally prohibitive. So we are looking at alternative solutions in that space for example.”
Also looking ahead William Richardson admits that while it is difficult to predict the future, the outlook for the incumbent banks looks moderately secure. “We would anticipate the continued dominance of Australian retail banks given the scale of their corporate lending, transactional banking and integrated payment solutions - albeit with the non-bank providers and investment banks continuing to gain market share. It would also be reasonable to expect greater scrutiny on pricing FX deals correctly to meet minimum ROE/RoRC hurdle rates and consequently, greater consistency in pricing for all clients segments.”
In summary, what emerges from an overview of e-FX trading in Australasia is how quickly the scene is changing. On the one hand regulators are rapid in reflecting new regulation and best practice that is being forged in Europe and North America. On the other hand banks are moving to more efficient and effective single bank portals as well as supporting activity on the global multi-bank platforms.
Their focus is increasingly on customer convenience and efficiency at all stages in the trading cycle. At the same time new technologies and capabilities are being brought to market by young, agile innovators, enabling customers from across the buy-side spectrum, from large institutions to individual retail investors, to gain better more cost-effective e-access to global FX. Australasia currently presents a very vibrant digital FX trading scene.
A dynamic retail sector
There is an active and growing retail trading market throughout Australasia. A recent online broking report by Investment Trends shows that the number of active online investors trading shares rose by 4% in the first six months of 2015. 620,000 unique Australian investors placed at least one share trade through an online broker in the 12 months to June 2015. Another finding was that six out of ten Australian online investors used a mobile device in relation to share trading up from 53% the previous year, ranking Australia middle of the pack rank among seven key markets surveyed by Investment Trends.
This upward trend is being driven by higher adoption of mobile trading amongst new investors and Gen Y traders. Investors under 35 years of age were overwhelmingly more likely to be mobile users.
Although the Australian Securities and Investments Commission (ASIC) restricted leverage trading for retail investors back in 2012, FX still remains a hugely attractive market for them. Last year’s Swiss National bank event and the volatility in the renminbi are still fresh in the memory, but there are plenty of ways into FX trading for private individuals in a well-regulated market.
“From an AxiTrader perspective,” says Alex Mackinnon, “regulatory developments aren’t likely to impede our strategies. Nor should they for any broker that is already regulated. If further regulatory developments happen to show up any brokers operating in an unregulated manner, I can see flow-on effect of traders seeking out brokers with a sounder reputation and accreditation.”
While the scale of retail FX trading in Australasia may not be on a par with that of private individuals in Japan, nonetheless there is vibrant activity both in the major currency pairs, and in other instruments with similar technology access. Mackinnon explains: “One of the key aspects is the continued centralisation of portfolios. While there’s still plenty of demand and growth within the traditional or core services like forex and metals, the breadth of products available to trade has expanded, and continues to expand, considerably.
As you add more instruments, for example non-deliverable forwards (NDFs), diversification is encouraged. And when you can add that capability within existing platforms and infrastructure, it’s much easier for buy-side clients to broaden their outlook beyond just the traditional or more familiar instruments.”
Even as buy-side customers of all sizes are gaining increased focus from the major banking groups, there is cold wind blowing from technology providers. These are looking to erode the traditional buy-side to bank to market model and disintermediate the banks.
“When we speak with the different clients types from asset managers through leveraged money to banks and brokers one of the biggest next developments is in their e-FX trading business. All the players are all taking more control of their execution, looking how to reduce execution costs and reduce dependancy on LPs by being market makers themselves,” says Tom Robinson at MahiFX.
“Clients are all becoming more accountable for their trade execution. In the past buy side firms might have used a single/multi bank platforms to cross spread and transfer risk, what these firms are doing now is taking reponsibility for the execution. They can do this using the MahiFX MFX Vector platform. Ultimately the way to minimise trading cost is to be a market maker. We have asset managers in Australia that we are helping to become market makers. They no longer want to cross spreads for a significant percentage of their flow. The clients also don’t want information leaked to the market in illiquid timezones or when executing large trades. So in my view a major change in prospect is this move to buy side firms becoming 1 sided market makers to passively reduce risk.”
So it plays to providers such as MahiFX for would be e-FX market participants to quickly consider what they want to do in the market, what technology they need to do it and then decide whether to buy or build their technology. It takes time and money to build, so buying can be the more suitable solution.