When it comes to promoting FinTech innovation in the Middle East there is a lot of competition. Dubai and Abu Dhabi for example, are both keen to capitalise on their geographical location which enables them to develop and manage a wide variety of commercial trading links between Asia, Europe and North America. New and highly advanced technology infrastructure is also enabling companies and institutions in these key financial centres to trade FX between the three continents on the same day.
Dubai, for example has been developing its smart city initiative. And among other things it aims to provide every Dubai resident with a connection to the government run blockchain system. This will speed up government processes and do away with paper transactions.
Abu Dhabi has also dedicated considerable funding to its digital government initiative and its gateway for use by its citizens and resident businesses. Both emirates are committed to diversifying their economies away from reliance on hydrocarbon revenues and financial services is one of the paths they’ve both chosen.
Meanwhile Saudi Arabia is bent upon establishing itself as a technology hub for the Middle East. It is investing vast capital resources to buying technology and infrastructure led by the Kingdom’s Ministry of Finance. Its aim is to develop its economy beyond oil and gas to be among the 15 largest economies in the world by 2030.
Bahrain, likewise is aiming to become a regional technology hub. The Central Bank of Bahrain is supporting an initiative to cultivate pioneering FinTech start up businesses that will foster the further development of its financial infrastructure.
We can view the adoption of electronic trading of FX and other asset classes among this developing tech-driven, digital landscape. Les Male, CEO of The Dubai Gold & Commodities Exchange (DGCX) explains, “Without question, the infrastructure you see being built in the Middle East is not just about buildings and skyscrapers. With governments embracing blockchain technology and the various FinTech hubs in the free zones, you can see that we are in the midst of a digital revolution. Our own parent company, DMCC (Dubai Multi Commodities Centre), is also heavily involved in the digital innovation and over the recent months we have seen increasing interest shown in their innovation hub.”
Meanwhile David Wilkins, Founder of Digecom Solutions a banking consultancy and CEO of FinQor Technologies a digital, cross-asset financial instrument management platform, also praises public sector leadership for the technology developments in the region. “I take my hat off to the leaders of these countries. To make anything work in any remit it needs to come from the top down. The thing about digital and FinTech innovation in this region is that it’s being led from the top.”
Buy side demand for e-FX
Frontloading the infrastructure in the key financial centres is designed to meet customer demand. So what are buy-side firms saying about the services they seek from those who supply them with FX services?
Vikas Jain, Head of Financial Institutions, Middle East and North Africa at Thomson Reuters, says that his firm has seen increased interest from firms seeking to improve and automate their workflow. “The main factors driving this change are their needs for real-time pricing, best execution, transparency and reporting tools. The buy-side is adopting electronic trading in an increased pace as many of the early obstacles are resolved with the latest technology and proven in other regions. Voice trading still plays an important role in this region. That said, the greater choices of technology and analytics are facilitating clients to demand automation in order to overcome operational risks, ensure efficient execution and meet their internal compliance and risk management requirements.”
He adds that the major banks are shifting their approach and are keen to select the best global systems rather than building their own or relying on regional providers. These efforts are in line with the digitalization initiatives that major UAE and Saudi banks have rolled out.
At rival multi-bank platform Bloomberg, Tod Van Name, the firm’s Global Head of Foreign Exchange Electronic Trading adds, “The Middle East’s foreign exchange market has evolved rapidly over the past few years. Starting from a relatively negligible base, the sector has thrived, thanks to a low-yield environment and growing investor appetite. The tools Middle East FX executives use today, with the exception of Islamic instruments, are similar to those we have been providing successfully to asset managers and corporate treasurers around the world.”
This applies to both spot trading on electronic platforms as well as to on-market instruments. Les Male at DGCX notes that, “As the dissemination of information and pricing has sped up, so the marginal trader is brought into the marketplace. This allows exchanges to work closely with both buy and sell side clients to formulate the right product framework to allow for cross-pollination in the FX market place. As an example, DGCX listened to its members in 2007 and went on to launch what became our flagship contract in the Indian Rupee.”
Sell side considerations
“There is definitely a serious lean towards digital innovation and rapid constructions of teams, group leaders, buzz words being used and new terminology coming into banks from all levels. Most banks now also have a dedicated digital division,” says David Wilkins, who works with a number of banks and financial institutions. “However, in my opinion, there remains a fundamental misconception around what digital actually means – 90+ per cent of the banks in the region are playing catch-up – taking too much time to ascertain where and what to invest in, and most are focused on “retail banking”. It’s clear that retail banking is a tier one product and service for the banks throughout the region, however the misconception is that digital = retail. I believe digital = integrated infrastructure that then allows for the overlaying of goods, services and channels on a digital base. This allows bank-wide products to be promoted and distributed throughout a bank’s systems. FX is a prime example. It’s required in transaction banking, retail banking, corporate and commercial, private and wealth etc. Integrating digital touch points on a product from the underlying layer ensures flow of product, consistency of pricing and distribution and, more importantly, appropriate risk mitigation and management.”
Further to this view, Bloomberg’s Tod Van Name says, “Faced with rapid growth, Middle Eastern firms are embracing the idea of electronic trading, but need to turn to global providers to meet their technology requirements. As regional banks start competing more with the bigger global banks, the need for them to stay innovative has increased. They are looking for a wider range of solutions, including real-time pricing, currency news and research, order and risk management, post -trade allocations and reporting.”
The latest regulatory change to impact the FX market globally has been the second iteration of Markets in Financial Instruments Directive (MiFID II). Although this was an EU regulation and the latest move in the ten-year long fall out from the financial crisis, all jurisdictions, including those in the Middle East, are mindful of it and considering their response.
“Many firms around the world have implemented new technology this year to adhere to MiFID II,” according to Bloomberg’s Tod Van Name. “While MiFID II went live in January 2018 and can impact markets around the world, we have not seen much impact on clients in Middle East, as most of the trading does not require the use of a multilateral trading facility (MTF).”
Even so, Thomson Reuters’ Vikas Jain notes that, “Middle East market participants are benefiting from global standards to improve their end-to-end FX workflow, access to enhanced MTF facilities that provide best execution, reporting and TCA. Looking at the future, regulations such as MiFID II could well become the global benchmark and gradual adoption across emerging markets would be required.”
Shariah FX trading
Athough not a regulatory issue, the growth of Shariah-complaint Islamic FX products also calls for a level of discipline that has particular resonance in the Middle East region. FX market participants advise that there is increasing demand for Sharia-compliant FX trading. While spot transactions can be traded conventionally, forwards, swaps and options require additional levels of control and documentation. This, in turn, frustrates attempts to automate the trading process.
“We’ve witnessed a significant interest in automating Wa’ad contracts,” says Vikas Jain. “There is also an increase focus on other asset classes like commodity Murabahah, Wakalas, and Tawrouqs. [Islamic finance products based upon binding promises to pay and a purchase and resale of assets that circumvent the charging of interest]. Due to compliance requirements, the banks want these instruments to have the same level of back-office integration as the conventional instruments. This will help in scaling Shariah compliant execution.”
Thomson Reuters has been a pioneer in introducing new technologies such as Islamic Deal App (IDA) to automate the workflow of Shariah compliant instruments. It optimizes workflow with a comprehensive, streamlined end-to-end solution that includes straight-through processing (STP), and trade history reports for Islamic trades executed.
In the meantime, most Sharia-compliant instruments are traded via voice. It looks likely that buy-side clients will oblige the market to innovate an electronic solutions that will integrate with other workflows while meeting the requirements of Islamic scholars.
Innovation in trading products
“Innovation is good for the marketplace,” according to DGCX’ Les Male. “DGCX prides itself on being at the forefront of this. For example, we’ve introduced new, ground-breaking products, such as the world’s only Shariah Gold contract, and we are the only exchange globally to list a product licensed from a Chinese exchange, Shanghai Gold. We see that the digital revolution is allowing more people to access prices and allow them to smooth out their valuation and income volatility.” Perhaps the cross-fertilisation from these asset classes will automate Shariah FX.
At ADS Securities, Managing Director and Global Head of Sales Mathieu Ghanem takes a slightly different view of innovation, based on the development of blockchain. “The future of all trading services will be linked to the development of blockchain and distributed ledger technology and crypto currencies,” he says. “This does not mean that overnight fiat currencies and the products related to these will stop being traded, quite the opposite. Traditional financial services will continue to drive the industry but the new technologies change the way that these services are accessed and the types of products that are available. The smaller, emerging market, financial centres have the ability to invest in the new systems and will lead the development of the new products. Blockchain and crypto currencies do not need the same infrastructure that anchors traditional FX trading to the main markets. The distribution will be based on expertise and connectivity, not liquidity and back-office functionality.”
This of course plays to agile, well-wired markets such as Dubai and Abu Dhabi. They may be able to leverage their technology to win market share from the larger marketplaces such as London and New York.
Spotting a gap in the market, David Wilkins established FinQor, a FinTech that speeds-up the integrated workflow. “I didn’t see any entity here that was focusing on the end-to-end delivery mechanism - how FX is sourced, priced, distributed, risk managed, hedged and then also the often neglected downstream operational components – confirmations, payment messaging and transactional reporting. FinQor provides a fully managed trading and matching platform from sourcing liquidity through to the trade messaging - offering tokenization, smart onboarding, smart KYC and underlying privatized payments messaging layer. We address an array, if not all, of the needs of the regional market and streamline the cost of transactions including those of payments by delivering everything on a distributed ledger/blockchain solution.”
Thomson Reuters’ Vikas Jain holds similar views on the role that blockchain can play, especially when linked to digital innovation in particular Middle Eastern centres.
“Middle East regulators and banks, particularly UAE, Saudi and Bahrain have been working hard on their digital innovation strategies in the last 12 to 24 months. Strong connections with the global trade, high internet and mobile penetration, high literacy rates and strong banking systems are some of the key enablers for executing digital innovation strategies. Digital innovation provides the opportunity to overcome some of the challenges provided in traditional economics and financial systems.”
The use of regulated crypto-currency is one of the most commonly used examples as an untapped potential for innovation in the region.
Vikas Jain continues, “In May 2009, GCC countries came close to launch a common currency called “Khalleji” or “Dinar”. One of the key concerns that hindered the execution was the location of the new central bank for this currency. With digital innovation, this may not be an obstacle anymore and there are already announcements by some GCC central banks in this regard. Blockchain can be the platform to link all the central banks in the region and create a “decentralized” central bank or a distributed “central bank” with each central bank in the GCC acting as a trusted node. With crypto, there is no need for a central location – a main obstacle to earlier discussions and the level of security will be much higher. While still in early stages, this and similar other ideas hold lot of promise for future innovation in the region.”
A region on a roll
Speaking to those like Jain who are playing active roles in the region, you get a sense of the energy and optimism that they share for the growth of electronic FX trading there. ADS’ Mathieu Ghanem is certainly one of these. “The world of financial services is changing. The main markets, which still handle a very high percentage of all global investments, are not going to disappear. However, specialist markets, which can invest in new technology and have the regulation in place to embrace blockchain and distributed ledger technology, can help all markets expand. The Middle East is a young market, but with many centuries of trading knowledge and expertise behind it. The ability to adopt and invest in new technology, to develop fit-for-purpose regulation and to offer new trading options will continue to support the region’s financial services growth.”
Les Male of DGCX is also leader in the forward charge towards the development of financial services in the region. “As a young, hungry and agile exchange we are perfectly placed across global time zones allowing us to capture trading out of Asia, Europe and the USA in addition to the GCC market too. We are confident that, in the near future, we will be able to offer additional innovative contracts and services in not only the FX space but also in the broader commodities market too. One of key tenets in doing this will be to work more closely with the regional banks, producers and refiners in order to continue on our desired path.”
What we can see are financial centres that are bristling with ambition while some of the major markets are distracted. London, for example, is grappling with Brexit as well as with burgeoning regulation that is now preoccupying most European and North American financial services businesses. While, these markets invest time, resources and money in complying with wave upon wave of new restrictions on their activities, newer centres in the Middle East region are investing in their infrastructure to attract new business.