The electronification of FX, particularly spot, has been extensively documented, making it amongst the most liquid financial markets. However, certain segments of this, within emerging markets, remain fragmented and offer limited access due to restrictions on capital or current accounts, or both. These restrictions, often introduced during periods of financial stress to prevent capital outflows and speculative activities, have not always been reversed, leading to the term ‘restricted’ markets. In such scenarios, parallel offshore markets often emerge, allowing for hedging exposure when access to deliverable spot or forward markets is restricted. Each restricted market has its own nuances and regulations, and Deutsche Bank’s extensive onshore presence means this is a real area of strength for us and consequently for our clients.
Manual vs. electronified markets
Restrictions do not necessarily mean that these markets have bypassed electronification. Depending on the size of the economy, countries like India and South Korea have developed local electronic trading platforms for interbank FX trading. While these platforms remain closed to foreign participants, they often have substantial trading volumes with liquidity comparable to more open markets.
Domestic market data and API-based hedging, where available, enable electronic pricing. However, foreign access typically involves additional prerequisites such as document checks and transaction reporting to meet regulatory requirements, making them harder to access. Most of these markets also operate within fixed trading hours, preventing round-the-clock availability. Therefore, while these markets may be electronified, restricted access often requires manual intervention in parts of the FX workflow.
Shifts in market dynamics
Several changes are underway in restricted markets. Firstly, there is a growing demand for faster and more transparent execution. Asset managers increasingly expect the same level of access to these markets as they have with more developed spot markets. Technology solutions like Deutsche Bank’s HausFX are designed to automate these workflows, allowing clients to access the markets and meet regulatory obligations without increasing manual work or operational risk. Secondly, restrictions on accessing onshore markets can stifle capital flows and, in some cases, prevent market inclusion in major indices. Many local authorities are now keen to deepen their financial markets and attract foreign investment, prompting moves to liberalize FX regulations.
Case Study: South Korea
South Korea recently undertook a major shift after decades of tight controls. The government eased FX regulations to enhance access to its FX and bond markets. Foreign investors with an Investment Exclusive Account (IEA) were granted access to the onshore FX market under the Registered Financial Institution (RFI) scheme. Documentation checks before every transaction were eliminated, and reporting requirements were lightened. Trading hours were extended to 2:00 a.m. local time to accommodate global participants. This initiative was well received, allowing foreign participants who had relied on the offshore NDF market to access the onshore market easily via RFIs. Interbank liquidity increased, and extended trading hours enabled hedging flows through the London close. These regulatory reforms may have been instrumental in South Korea’s inclusion in the World Government Bond Index (WGBI), setting a precedent for the benefits of easing restrictions.
Future prospects for opening markets
At Deutsche Bank, we have been a key partner to both clients and local authorities in the journey of easing market access. Extended trading hours allow clients to operate in their preferred time zones, and there is growing demand for end-of-day fixing services that align with broader FX rebalancing flows. Clients no longer have to wait for the local market to open—they can hedge exposures as soon as needed, whether for equities, bonds, or portfolio rebalancing. This unlocks opportunities for automated workflow solutions within HausFX, tailored to the timing and nature of capital flows. Licensing will remain a factor for operating in onshore markets, and how this evolves will be worth watching. As these markets mature, we see significant demand from clients for a broader suite of execution tools, similar to those they are familiar with from G10 markets, such as algorithmic execution and electronic order capabilities.
Impact on domestic players
The opening of restricted markets does affect domestic players, though not necessarily negatively. Domestic banks often focus on local clients, while foreign investors typically access the market via global banks, which may partner with local institutions or use their own branches. This partnership could see increased demand from global banks for services such as reporting and settlement looking to avoid operational risks and instead focus on client execution. Local markets also deepen through foreign participation. For example, Korean banks now have new counterparties to hedge risk, reducing transaction costs for clients. Given that local markets have historically been traded on voice, especially on the client side, electronification typically increases both competition and market data availability, consequently improving transparency and lowering execution costs, including hedging costs for local players. On balance, it’s a natural progression that benefits the majority of market participants.