The revolution that brought electronic trading to every corner of the spot foreign exchange market is finally sweeping across the FX swaps market. Recent technological advancements and the emergence of electronic inter-dealer swap venues are supporting this transformation. Previously hindered by a lack of price transparency, poor technology, and a reluctance amongst liquidity providers to reveal their market positioning, the FX swaps market is benefiting from these new solutions. Not only do they aim to deliver a transparent trading experience and reshape traditional practices, but they also recognize the importance of relying on benchmark-quality data.
New Change FX (NCFX), renowned for its production of live, regulated FX benchmark data and analytics, recently launched its ground-breaking product NCFX Forwards365™ and will soon follow with NCFX Basis365™. This data will accelerate the electronification of the FX swaps market by filling in the gaps that have held the market back.
Accurate data in the FX swaps space can support market development and more efficient outcomes for buy-side clients, banks, and other market participants. It is essential for price discovery, pre-trade tools, training machine learning algorithms, establishing guardrails for electronic trading to enable efficient execution, post-trade analytics and finance and valuation.
The complexity of swaps pricing and use cases for independent data
The pricing of FX swaps is complex. Every FX swap price reflects where any individual trader sees the market, any axe they have and a credit element. Pricing accurately is a resource intense process and mostly only available to banks, leaving clients in the dark.
Liquidity and price discovery in the FX forward curve have traditionally been concentrated around the standard tenors, e.g. 1-week or 1-month tenors, with shorter dates tending to attract more liquidity than longer dates. Adding to the challenge of pricing longer dates, the credit element becomes more significant when moving out along the curve. Price discovery for the dates between the standard tenors has been even more challenging. Until now, data providers were using straight-line interpolation between standard tenors. This simplified approach ignores principal factors like central bank rate changes, rendering the data wrong from the outset.
NCFX’s Forwards365™ has revolutionised the data space by focusing on “market-neutral” pricing for the standard tenors and then using an appropriate method for incorporating other factors, like central bank rate changes and turns, appropriately. NCFX Forwards365™ provides accurate swap prices for all days along the curve for 365 days.
NCFX Forwards365™ delivers transparency and independent pricing and allows market participant access to data which, in the words of one of our clients, would require ‘significant investment and take years and multiple headcounts to produce ourselves’.
The use cases for our clients have been many. For buy-side clients for instance, our data and NCFX Forwards365™ pre-trade tools help reduce market impact by allowing them to filter their liquidity providers before they ask for pricing. The data also helps reduce pricing errors and enables our clients to make more informed pre-trade decisions, like selecting the most advantageous date for them to roll to. Or it can be used to help determine what part of the curve a whole portfolio across multiple currencies should be rolled to. In other words, it can be used to determine the optimal roll date across all the competing currencies. Our TCA (Transaction Cost Analysis) clients can be sure that post-trade execution is measured against true, independent, and accurate benchmark data.
For “quants” and those building AI-models, the best input is critical; clearly, building solutions on inaccurate data is not only a waste of time but also delivers false outcomes. An increasing number of buy-side clients are building their own analytics in-house and focusing on machine learning (ML) projects for pre- and post-trade analytics, but these will have limited value if they are produced using the wrong data. By building an independent, granular swaps curve for all dates out to one year, taking care to properly construct the curve and make it as credit neutral as possible, we are enabling the production of game-changing models.
For price-makers, like everyone else, resources are limited. Bank traders are now expected to make more prices across more currencies more of the time with fewer people than ever before. A bank’s head of e-trading needs to provide tradeable e-prices and for them to be available to their franchise for as long as possible. Our feeds enable guardrails around that pricing giving the trader a clearer visualization of a potentially stale price. This is especially useful for the less-liquid currency pairs, flagging off-rates and providing an extra set of eyes on the screens. For some banks, having an alternative curve is reassuring while some smaller banks can save money by not building curves themselves for currency pairs where they see infrequent demand from their network. For these banks, having an alternative validation to the inputs from their liquidity providers or purchased data feeds, which may lack independence, enhances confidence and competitiveness in their client offerings.
For finance and risk teams, independent data enables true market valuations and reduces internal discussions between operations and trading teams.
NCFX Basis 365™
As the backbone for an electronic market in swaps, NCFX Forwards365™ and its soon-to-be-released sister product NCFX Basis365™ are indispensable. NCFX Basis365™ is a live stream of the prevailing market neutral basis for all dates out to one year. It will enable the market to easily break apart the components of the swaps market. That is the credit component and the two components that make up the market neutral price: the relative domestic risk-free cash flows implied by the domestic interest rate curves and the basis implied by the cross-currency swap. By illuminating all the components of the market, NCFX Forwards365™ and NCFX Basis365™ can draw liquidity into the electronic swaps market as market makers see opportunities to reflect their views on basis in this market.
Summary
The landscape of FX swaps is on the cusp of a long-awaited transformation, driven by the convergence of technology, data analytics, and market demand for more sophisticated and accessible solutions. NCFX’s Forwards365™, NCFX Basis365™ and analytics address the complexities of pricing, while advances in automation, data utilization, and electronic trading platforms are shaping a future where FX swaps are more efficient, transparent, and accessible to a wider range of participants. As the market continues to evolve, embracing these changes and relying on accurate and independently priced swaps will be crucial for staying competitive. Straight line interpolation, a crude approximation that was wrong by design, is no longer fit for purpose and will be consigned to history in the new era of automation and sophisticated modelling.
For more information please contact: Kinga.broel-plater@newchangefx.com or visit www.newchangefx.com