Addressing challenges around liquidity remains one of the key considerations for electronic FX swaps market participants as the market continues to evolve.
In the FX Swaps market there is increasing demand for more currency pairs and longer dated tenors to be quoted. This is being driven by various factors, including clients using swaps to hedge over longer periods to provide more certainty, improved access to liquidity and greater execution flexibility, institutional investors using swaps as part of their broader portfolio management and companies being exposed to a wider range of currencies.
Greater electronic trading of FX swaps will contribute to a number of significant changes to market structure according to Robin Nicholas, head of swaps product at 360T.
“We should see continued advancement in data, liquidity, cost reduction and credit facilitation and automation,” he says. “More transparent market data should lead to better price discovery and increased market transparency which should also make it easier for market making institutions to provide continuous pricing electronically.”
Nicholas expects electronic platforms to become even more central to market structure, providing pools of liquidity from a wide range of market participants. With automation, transaction costs should decrease, making it more cost-effective for participants to trade FX swaps.
Traders facing familiar challenges
However, Marco Kuper, CPO at DIGITEC, reckons FX swap trading is facing similar challenges to the spot market in that the further growth of electronic channels will produce more fragmentation of liquidity.
“Accurately measuring and visualising available liquidity will become more challenging as the same liquidity might be reflected across different venues,” he says. “It will become an increasingly complex task to get an accurate picture of the market in real time. In turn, dealers will have to decide where to provide liquidity and how to differentiate their offering across different channels.”
Kuper notes that for the tools within the workflow, the challenge will be to identify significant market events and decide which ones to react to. It is now the norm for clients to analyse quote quality – either directly or via trading venues – so speed and accuracy are essential for banks to maintain their share of client business.
Buy-side firms such as asset managers, corporates and asset owners are increasingly seeking to trade FX swaps in multiple currencies and longer tenors to hedge and better manage FX exposure across global markets. These are typically rolled monthly or quarterly using FX forwards or swaps, which go well beyond just overnight or tom-next tenors.
“We are starting to see demand on pure algo execution for clients but it is very early days. The limiting factor is very thin dealer-to-dealer liquidity in terms of currency pairs, tenors and venues.”
Loic Bourgeois-Ducournau
Meanwhile Jay Moore, global head of new and derivative products at LMAX Exchange observes that swaps remain predominantly OTC, much of which is still voice or IB chat, with buy-side firms depending on banks for both credit and liquidity via ISDA agreements.
“This limits access to pricing across the broader market,” he says. “A shift is underway to separate credit from liquidity, very much mirroring prime brokerage in hedge funds, allowing banks to sponsor client credit into new liquidity sources like peer-to-peer venues and specialist liquidity providers. This expands access to pricing, reduces market impact and gives banks a way to monetise unused balance sheet capacity.”
Loic Bourgeois-Ducournau, head of EMEA eFIC sales at Societe Generale observes that clients have always traded many tenors, be that for liquidity management, carry, rate views or arbitrage. What might have changed, he suggests, is the hedge horizon and the fact that experienced clients are really looking into cost of execution (using TCA) and want to optimise their hedging.
“We can clearly see a tightening of spreads,” he says. “Electronic channels encourage fierce competition between banks and there has been growth in peer-to-peer venues.”
Saas, cloud as building blocks
Bourgeois-Ducournau refers to SaaS and the cloud as tools for technologists to help build solutions for the finance community, noting they may be used for swaps execution because the latency requirement for proper pricing is less intense than for spot or equities trading.
“This could lead to fragmentation of the offer with different platforms fed by a few players,” he warns. “The real difficulty for swaps trading automation lies in the capacity to manage delivery risk in quasi real-time.”
This requires heavy duty computing and in general redesign of antiquated systems. For instance, dealer-to-dealer initiatives have progressed very slowly because of banks’ difficulties exposing an efficient credit check mechanism.
“More transparent market data should lead to better price discovery and increased market transparency which should also make it easier for market making institutions to provide continuous pricing electronically.”
Robin Nicholas
Moore explains that platforms using SaaS and cloud technology enable rapid innovation and the introduction of new models like credit intermediation and tools such as real-time TCA – delivering better execution and more efficient access to liquidity, especially for smaller players who can compete on price and liquidity rather than relying on the ISDA and credit approval process to dictate with whom they can trade.
“A host of factors, including regulatory pressures, internal resource constraints, balance sheet efficiency and the need for greater transparency are driving interdealer FX swap trading toward electronic platforms,” he says. “Electronification improves price discovery, streamlines workflows and reduces operational risk.”
SaaS has made state-of-the-art FX swaps technology more accessible. In-depth expertise and efficient monitoring allow smaller teams to participate in the swaps and NDF market and remain competitive in terms of pricing.
“For software vendors, SaaS offers the possibility of working more closely with clients and incorporating their feedback,” observes Niels Joost, quant and software engineer at DIGITEC. “It enables a faster cycle of innovation, with rapid iteration based on continuous user feedback and the emerging needs of the market.”
Barriers to market entry
DIGITEC has observed a general willingness to participate in the different emerging interdealer electronic venues but also technological and operational barriers for entry, as for most market makers the liquidity available on these platforms has not been large enough to warrant any significant investment in the technology and workflows needed to actively participate.
“We now see innovative solutions to allow participants of different sizes to participate in these marketplaces,” says Kuper. “As an example, when we built our D3 OMS service, banks demanded nuanced order placement – meaning that when a trader’s curve moved their prices would be updated automatically.”
“Accurately measuring and visualising available liquidity will become more challenging as the same liquidity might be reflected across different venues.”
Marco Kuper
Powerful analytics and risk management tools that were once only available to larger institutions have become more widely available and accessible, allowing smaller banks to better manage their FX swap positions, monitor market conditions in real-time and make more informed trading decisions, observes Nicholas.
“New algos will appear, for example through our collaboration with Quantitative Brokers, which will offer the opportunity to access previously internalised liquidity or perhaps executions pegged to a market benchmark rate,” he says.
The migration of interdealer FX swap trading to electronic venues is driven by improvements in liquidity, execution speed, operational efficiency, pricing transparency, cost-effectiveness and automated credit.
“Technological advances, regulatory pressures and the growing use of algorithmic trading are all contributing to this shift,” adds Nicholas. “However, the biggest influence has been the advancement in credit management tools.”
Buy-side firms such as asset managers, corporates and asset owners are increasingly seeking to trade FX swaps in multiple currencies and longer tenors
Risk recycling evolves
Factors influencing interdealer FX swap trading and encouraging further migration to electronic venues include more efficient workflow, cost saving, longer hours availability and better service to clients. As banks move more into electronification, it makes sense that the recycling of risk follows – be it through introduction of more algo trading or dealer-to-dealer venues.
“Ebook becomes more mature and extends its scope through longer maturities, larger sizes and additional currency pairs,” says Bourgeois-Ducournau. “Most of the flows are still hedged in the broker market. We are starting to see demand on pure algo execution for clients but it is very early days. The limiting factor is very thin dealer-to-dealer liquidity in terms of currency pairs, tenors and venues.”
“A shift is underway to separate credit from liquidity, very much mirroring prime brokerage in hedge funds, allowing banks to sponsor client credit into new liquidity sources like P2P venues and specialist LPs.”
Jay Moore
He notes that most banks will have very similar curves and will seek to gain advantage by having the quickest platforms and introducing AI to provide the most accurate and timely pricing, for example using chat venues from brokers to update the curve.
Moore suggests that data is central to the evolution of FX swaps. “Today, pricing varies due to inconsistent curve-building practices and opaque inputs. Traders rely on a few counterparties for pricing benchmarks, limiting transparency. Access to deep, independent pricing data improves confidence in execution quality and leads to better outcomes for end clients.”
Broader, more reliable data inputs create consistency in curve-building, leading to more accurate and sophisticated pricing models, he adds. “Additionally, access to independent third party swaps data sources and cross market trades data reinforce and validate the curves, reducing inconsistencies.”
Joost explains that data is only effective if the underlying components of the workflow can effectively consume and interpret it.
“For a long time, there was more data available than could be handled by the pricing engines,” he says. “But pricing engines are catching up, which indicates that the market is ready for richer data to be made available. This allows data providers and pricing engines to tackle issues such as smarter ways to handle sudden volatility, accuracy of pricing in times of market uncertainty or creating feedback loops by incorporating trade performance data back into the pricing models.”
SaaS has made state-of-the-art FX swaps technology more accessible
Data aggregation optimising liquidity
Liquidity providers are using data to offer more personalised services, tailoring FX swap solutions based on clients’ specific hedging needs and exposure profiles. Some banks plan to optimise liquidity by aggregating data from multiple liquidity sources.
Nicholas notes that reducing the number of platform interfaces on a trader’s desk by consolidating and aggregating liquidity allows banks to execute trades optimally, while also reducing the market surveillance and governance overheads of multiple venues
“With more automation, real-time data feeds will be integrated into risk management platforms, enabling institutions to monitor and manage exposure continuously,” he adds. “We should also see more machine learning and AI as the electronic FX swap segment matures.”
As for the outlook for the NDF swaps market, Joost refers to a growing push among clients to expand their electronic offerings.
“While key tenors such as the 1M forward have been liquid for some time, there is now greater demand for pricing across the entire curve,” he says. “However, reliable and accurate data beyond the 1M tenor remains limited. Tools like our SDF can help bridge this gap and the increased adoption of electronic trading channels suggests that more robust data sources may soon be available.”
“While key tenors such as the 1M forward have been liquid for some time, there is now greater demand for pricing across the entire curve. However, reliable and accurate data beyond the 1M tenor remains limited.”
Niels Joost
As NDFs migrate to electronic channels, data quality is expected to improve further and make these markets more transparent.
While traders will continue to hold a pivotal role, they will increasingly configure systems to react automatically in line with their strategies. At the same time, AI is poised to become an integral part of trading workflows, though its adoption will be guided by regulatory and compliance considerations.
“The real challenge for next-generation trading tools will be striking the right balance, enabling high level oversight while still offering swift, detailed insights for human investigation and intervention where needed,” says Kuper.
Positive outlook for NDFs
Nicholas describes the outlook for NDF volumes as positive with factors such as offshore currency restrictions/capital controls and wider macroeconomic developments making them a critical hedging tool.
“Just over a quarter of the NDF market is currently cleared, but reducing counterparty risk could well encourage other market participants and lead to even greater growth in this market,” he adds.
Central limit order book growth will drive the development of FX swaps trading for the interdealer segment on the back of venues that are built specifically for interdealer trading as well as credit automation and more sophisticated bank pricing engines.
“Similar to the evolution of spot, on-venue visible bids and offers will improve price transparency and the ability for members of the 360T SUN platform to exchange risk in a dark pool – at an independent mid-price – should ensure better pricing, improve liquidity and provide a more efficient marketplace,” says Nicholas.
Powerful analytics and risk management tools that were once only available to larger institutions have become more widely available and accessible
“This liquidity may become fragmented but I don’t expect to see the proliferation of venues that we see in spot,” he adds. “Market utilities will emerge, providing credit management workflows, connectivity and outsourced pricing engines and liquidity aggregators. Whether we see a true all-to-all blend of client and dealer FX swap liquidity though is an ongoing debate.”
A growing priority for the market is to lessen the segregation of liquidity between sell-side and buy-side. Historically, sell-side firms have enjoyed the benefits of the interbank markets to easily transfer risk amongst themselves as a source to inexpensively hedge out of client (buy-side) risk while the buy-side have relied on the limited number of banks where they have ISDAs and credit lines available to trade.
“For the first time, with the introduction of credit intermediation, buy-side firms can now have sponsorship into all-to-all pools of liquidity where they can level the playing field and more directly find naturally offsetting liquidity on similar pricing terms to interbank participants,” concludes Moore.
Electronic FX Swaps: Accelerating the pace of change across the market
Addressing challenges around liquidity remains one of the key considerations for electronic FX swaps market participants as the market continues to evolve.
In the FX Swaps market there is increasing demand for more currency pairs and longer dated tenors to be quoted. This is being driven by various factors, including clients using swaps to hedge over longer periods to provide more certainty, improved access to liquidity and greater execution flexibility, institutional investors using swaps as part of their broader portfolio management and companies being exposed to a wider range of currencies.
Greater electronic trading of FX swaps will contribute to a number of significant changes to market structure according to Robin Nicholas, head of swaps product at 360T.
“We should see continued advancement in data, liquidity, cost reduction and credit facilitation and automation,” he says. “More transparent market data should lead to better price discovery and increased market transparency which should also make it easier for market making institutions to provide continuous pricing electronically.”
Nicholas expects electronic platforms to become even more central to market structure, providing pools of liquidity from a wide range of market participants. With automation, transaction costs should decrease, making it more cost-effective for participants to trade FX swaps.
Traders facing familiar challenges
However, Marco Kuper, CPO at DIGITEC, reckons FX swap trading is facing similar challenges to the spot market in that the further growth of electronic channels will produce more fragmentation of liquidity.
“Accurately measuring and visualising available liquidity will become more challenging as the same liquidity might be reflected across different venues,” he says. “It will become an increasingly complex task to get an accurate picture of the market in real time. In turn, dealers will have to decide where to provide liquidity and how to differentiate their offering across different channels.”
Kuper notes that for the tools within the workflow, the challenge will be to identify significant market events and decide which ones to react to. It is now the norm for clients to analyse quote quality – either directly or via trading venues – so speed and accuracy are essential for banks to maintain their share of client business.
Buy-side firms such as asset managers, corporates and asset owners are increasingly seeking to trade FX swaps in multiple currencies and longer tenors to hedge and better manage FX exposure across global markets. These are typically rolled monthly or quarterly using FX forwards or swaps, which go well beyond just overnight or tom-next tenors.
“We are starting to see demand on pure algo execution for clients but it is very early days. The limiting factor is very thin dealer-to-dealer liquidity in terms of currency pairs, tenors and venues.”
Loic Bourgeois-Ducournau
Meanwhile Jay Moore, global head of new and derivative products at LMAX Exchange observes that swaps remain predominantly OTC, much of which is still voice or IB chat, with buy-side firms depending on banks for both credit and liquidity via ISDA agreements.
“This limits access to pricing across the broader market,” he says. “A shift is underway to separate credit from liquidity, very much mirroring prime brokerage in hedge funds, allowing banks to sponsor client credit into new liquidity sources like peer-to-peer venues and specialist liquidity providers. This expands access to pricing, reduces market impact and gives banks a way to monetise unused balance sheet capacity.”
Loic Bourgeois-Ducournau, head of EMEA eFIC sales at Societe Generale observes that clients have always traded many tenors, be that for liquidity management, carry, rate views or arbitrage. What might have changed, he suggests, is the hedge horizon and the fact that experienced clients are really looking into cost of execution (using TCA) and want to optimise their hedging.
“We can clearly see a tightening of spreads,” he says. “Electronic channels encourage fierce competition between banks and there has been growth in peer-to-peer venues.”
Saas, cloud as building blocks
Bourgeois-Ducournau refers to SaaS and the cloud as tools for technologists to help build solutions for the finance community, noting they may be used for swaps execution because the latency requirement for proper pricing is less intense than for spot or equities trading.
“This could lead to fragmentation of the offer with different platforms fed by a few players,” he warns. “The real difficulty for swaps trading automation lies in the capacity to manage delivery risk in quasi real-time.”
This requires heavy duty computing and in general redesign of antiquated systems. For instance, dealer-to-dealer initiatives have progressed very slowly because of banks’ difficulties exposing an efficient credit check mechanism.
“More transparent market data should lead to better price discovery and increased market transparency which should also make it easier for market making institutions to provide continuous pricing electronically.”
Robin Nicholas
Moore explains that platforms using SaaS and cloud technology enable rapid innovation and the introduction of new models like credit intermediation and tools such as real-time TCA – delivering better execution and more efficient access to liquidity, especially for smaller players who can compete on price and liquidity rather than relying on the ISDA and credit approval process to dictate with whom they can trade.
“A host of factors, including regulatory pressures, internal resource constraints, balance sheet efficiency and the need for greater transparency are driving interdealer FX swap trading toward electronic platforms,” he says. “Electronification improves price discovery, streamlines workflows and reduces operational risk.”
SaaS has made state-of-the-art FX swaps technology more accessible. In-depth expertise and efficient monitoring allow smaller teams to participate in the swaps and NDF market and remain competitive in terms of pricing.
“For software vendors, SaaS offers the possibility of working more closely with clients and incorporating their feedback,” observes Niels Joost, quant and software engineer at DIGITEC. “It enables a faster cycle of innovation, with rapid iteration based on continuous user feedback and the emerging needs of the market.”
Barriers to market entry
DIGITEC has observed a general willingness to participate in the different emerging interdealer electronic venues but also technological and operational barriers for entry, as for most market makers the liquidity available on these platforms has not been large enough to warrant any significant investment in the technology and workflows needed to actively participate.
“We now see innovative solutions to allow participants of different sizes to participate in these marketplaces,” says Kuper. “As an example, when we built our D3 OMS service, banks demanded nuanced order placement – meaning that when a trader’s curve moved their prices would be updated automatically.”
“Accurately measuring and visualising available liquidity will become more challenging as the same liquidity might be reflected across different venues.”
Marco Kuper
Powerful analytics and risk management tools that were once only available to larger institutions have become more widely available and accessible, allowing smaller banks to better manage their FX swap positions, monitor market conditions in real-time and make more informed trading decisions, observes Nicholas.
“New algos will appear, for example through our collaboration with Quantitative Brokers, which will offer the opportunity to access previously internalised liquidity or perhaps executions pegged to a market benchmark rate,” he says.
The migration of interdealer FX swap trading to electronic venues is driven by improvements in liquidity, execution speed, operational efficiency, pricing transparency, cost-effectiveness and automated credit.
“Technological advances, regulatory pressures and the growing use of algorithmic trading are all contributing to this shift,” adds Nicholas. “However, the biggest influence has been the advancement in credit management tools.”
Risk recycling evolves
Factors influencing interdealer FX swap trading and encouraging further migration to electronic venues include more efficient workflow, cost saving, longer hours availability and better service to clients. As banks move more into electronification, it makes sense that the recycling of risk follows – be it through introduction of more algo trading or dealer-to-dealer venues.
“Ebook becomes more mature and extends its scope through longer maturities, larger sizes and additional currency pairs,” says Bourgeois-Ducournau. “Most of the flows are still hedged in the broker market. We are starting to see demand on pure algo execution for clients but it is very early days. The limiting factor is very thin dealer-to-dealer liquidity in terms of currency pairs, tenors and venues.”
“A shift is underway to separate credit from liquidity, very much mirroring prime brokerage in hedge funds, allowing banks to sponsor client credit into new liquidity sources like P2P venues and specialist LPs.”
Jay Moore
He notes that most banks will have very similar curves and will seek to gain advantage by having the quickest platforms and introducing AI to provide the most accurate and timely pricing, for example using chat venues from brokers to update the curve.
Moore suggests that data is central to the evolution of FX swaps. “Today, pricing varies due to inconsistent curve-building practices and opaque inputs. Traders rely on a few counterparties for pricing benchmarks, limiting transparency. Access to deep, independent pricing data improves confidence in execution quality and leads to better outcomes for end clients.”
Broader, more reliable data inputs create consistency in curve-building, leading to more accurate and sophisticated pricing models, he adds. “Additionally, access to independent third party swaps data sources and cross market trades data reinforce and validate the curves, reducing inconsistencies.”
Joost explains that data is only effective if the underlying components of the workflow can effectively consume and interpret it.
“For a long time, there was more data available than could be handled by the pricing engines,” he says. “But pricing engines are catching up, which indicates that the market is ready for richer data to be made available. This allows data providers and pricing engines to tackle issues such as smarter ways to handle sudden volatility, accuracy of pricing in times of market uncertainty or creating feedback loops by incorporating trade performance data back into the pricing models.”
Data aggregation optimising liquidity
Liquidity providers are using data to offer more personalised services, tailoring FX swap solutions based on clients’ specific hedging needs and exposure profiles. Some banks plan to optimise liquidity by aggregating data from multiple liquidity sources.
Nicholas notes that reducing the number of platform interfaces on a trader’s desk by consolidating and aggregating liquidity allows banks to execute trades optimally, while also reducing the market surveillance and governance overheads of multiple venues
“With more automation, real-time data feeds will be integrated into risk management platforms, enabling institutions to monitor and manage exposure continuously,” he adds. “We should also see more machine learning and AI as the electronic FX swap segment matures.”
As for the outlook for the NDF swaps market, Joost refers to a growing push among clients to expand their electronic offerings.
“While key tenors such as the 1M forward have been liquid for some time, there is now greater demand for pricing across the entire curve,” he says. “However, reliable and accurate data beyond the 1M tenor remains limited. Tools like our SDF can help bridge this gap and the increased adoption of electronic trading channels suggests that more robust data sources may soon be available.”
“While key tenors such as the 1M forward have been liquid for some time, there is now greater demand for pricing across the entire curve. However, reliable and accurate data beyond the 1M tenor remains limited.”
Niels Joost
As NDFs migrate to electronic channels, data quality is expected to improve further and make these markets more transparent.
While traders will continue to hold a pivotal role, they will increasingly configure systems to react automatically in line with their strategies. At the same time, AI is poised to become an integral part of trading workflows, though its adoption will be guided by regulatory and compliance considerations.
“The real challenge for next-generation trading tools will be striking the right balance, enabling high level oversight while still offering swift, detailed insights for human investigation and intervention where needed,” says Kuper.
Positive outlook for NDFs
Nicholas describes the outlook for NDF volumes as positive with factors such as offshore currency restrictions/capital controls and wider macroeconomic developments making them a critical hedging tool.
“Just over a quarter of the NDF market is currently cleared, but reducing counterparty risk could well encourage other market participants and lead to even greater growth in this market,” he adds.
Central limit order book growth will drive the development of FX swaps trading for the interdealer segment on the back of venues that are built specifically for interdealer trading as well as credit automation and more sophisticated bank pricing engines.
“Similar to the evolution of spot, on-venue visible bids and offers will improve price transparency and the ability for members of the 360T SUN platform to exchange risk in a dark pool – at an independent mid-price – should ensure better pricing, improve liquidity and provide a more efficient marketplace,” says Nicholas.
“This liquidity may become fragmented but I don’t expect to see the proliferation of venues that we see in spot,” he adds. “Market utilities will emerge, providing credit management workflows, connectivity and outsourced pricing engines and liquidity aggregators. Whether we see a true all-to-all blend of client and dealer FX swap liquidity though is an ongoing debate.”
A growing priority for the market is to lessen the segregation of liquidity between sell-side and buy-side. Historically, sell-side firms have enjoyed the benefits of the interbank markets to easily transfer risk amongst themselves as a source to inexpensively hedge out of client (buy-side) risk while the buy-side have relied on the limited number of banks where they have ISDAs and credit lines available to trade.
“For the first time, with the introduction of credit intermediation, buy-side firms can now have sponsorship into all-to-all pools of liquidity where they can level the playing field and more directly find naturally offsetting liquidity on similar pricing terms to interbank participants,” concludes Moore.