NDF trading: Clearing the path towards further electronification

In recent years, the non-deliverable forwards (NDF) market has served as the primary vehicle for emerging market countries with capital controls in place. Increased global macroeconomic volatility combined with the expansion of globalised trade has led to significant growth in these currencies and made NDFs a critical tool for global market participants to manage their exposure.

Geographically, the biggest demand continues to be in Asia and Latin America. “Significant inflows and volatility have made the Andean pairs growth hotspots for the region,” says Brian Andreyko, chief product officer at Edgewater Markets, the US-based FX trading technology provider. “In Asia, while smaller markets have grown due to rising investor interest, Korea and India continue to lead the way. These markets aim to replicate China’s success in achieving global trade for their currencies, with local banks serving as the primary market makers and inventory participants.”

However, it’s not just about the globalisation tailwind. “These currencies have benefited from electronification and a regulatory environment fostering growth. Notably, Korea and Chile are advancing toward deliverable currencies, while Argentina is striving to attract global investments, focusing on both infrastructure and fixed-income investment products. Investments like these require NDF trading to return to mainstream so that those investments can be hedged,” says Andreyko. 

The NDF market’s adoption of electronic trading and central clearing has typically lagged other emerging market derivatives. However, this has changed in recent years to the point where NDFs are rapidly catching up with their counterparts, says Andreyko. “The adoption of electronic trading and central clearing in NDF markets is paramount to accelerate growth in trading, as these address two fundamental aspects that have previously limited growth. While electronic trading has been around in currency markets for some time, what is fundamentally changing, and here at Edgewater we are helping to accelerate, is the adoption of technology by local participants, who have that local market expertise, to provide them with a competitive edge. Overlaying technology to unlock their core business potential allows them to scale their franchise,” says Andreyko. 

“As forward instruments, which are credit intensive, inclusive of NDFs, the adoption of central clearing helps alleviate credit constraint, allowing for a broader audience to access deeper localized liquidity. These developments combined are modernizing the NDF market, aligning it closer to global market credit standards.”

There are, however, some inevitable regulatory challenges to overcome, says Andreyko. “Regulation varies from country to country, presenting an inconsistent global framework, which makes things challenging for global players.  Competing interpretations for these markets creates uncertainty for offshore investors, who must navigate varied rules.  However, with electronification comes normalization, as our clients have leveraged technology to create tailor-made workflows for individual markets that programmatically comply with regulation to maximize execution outcomes and mitigate risks.”

Local recruitment

Surging NDF demand has led FX providers to respond by launching new electronic trading products and services, says Andreyko. For example, a growing number of providers are recruiting locally-placed staff and developing products unique to each country and the client requirements to electronify their franchise. “In many cases that can include a credit facility or distribution, but it always includes a technology build specifically designed for each client. As the markets become more efficient in each emerging market, trading volumes increase naturally. In turn, more demand is produced from regional clients as they grow and develop their markets,” says Andreyko. 

There has also been work done to improve one of the weaknesses of the NDF market – the fragile liquidity environment in which some NDFs operate. These efforts have centred on local market makers and their expansion to a broader set of global players, says Andreyko. “Local providers offer improved transparency and accessibility, with deep books of liquidity to accommodate transactions of any size.  Many of our clients now provide direct RFQ trading for their NDF currencies across tenor and broken dates, replacing voice and text-based trading chat rooms, increasing efficiencies and volumes. As volumes and transaction sizes continue to grow, central clearing becomes ever more important in reducing counterparty risk for players who are credit constrained.  These developments collectively enable more robust and efficient NDF trading.”

Demand for NDF algos is also rising as investors seek efficient execution and automation in volatile, price sensitive markets, for which emerging markets are known. However, algos require two things to function well, consistency in pricing data and depth of market, says Andreyko. “Traditionally, NDF markets have characteristically been fragmented, leading to limited and patchy market data. As local market players are now active in the global markets through electronification, pricing has become very consistent, providing the data needed for algos to function well. In addition, local players dominate their currencies and have local trade flows and depth of book to warehouse the large orders that algos are designed to execute, significantly limiting market impact.”

To further the electronification of NDF markets requires improved local infrastructure and regulatory alignment, he adds. “In addition, increased adoption of technology, automation and thus scalability, by a greater number of local players, coupled with credit and distribution solutions, will foster more efficient NDF trading. These advancements will continue to reduce costs, enhance execution quality and improve risk management leading to greater global market efficiency.” 

Ultimately, firms should choose an NDF provider based on liquidity access, advanced execution technology and cost efficiency, says Andreyko. “A strong provider is more than just a technology vendor, but a true partner.  At Edgewater, we offer tailored solutions that fully adapt to clients, deep and transparent pricing, and coverage across broken dated forwards and Non-Deliverable Swaps (NDS). Local client support and a proven track record are essential, enhanced trading outcomes. Yes, the technology component is important, but so too is a local presence, an understanding of each client’s franchise, and a clear strategy to provide, technologically, what is needed to support growth and scalability.” 

The future of NDFs lies in continued growth driven by emerging market investment, regulatory alignment, and globalization of credit and currencies, says Andreyko. “Advances in electronic trading, AI-driven analytics and smart order routing will continue to enhance both efficiency and liquidity. Harmonized global regulations will reduce complexity, attracting direct market participation from non-bank players, hedge funds and real money asset managers. These developments will foster greater adoption of the product for currency risk management and trading, as well as localized market-making participants as the primary source of inventory and liquidity.”

Increasing liquidity access

For FX firms, the opportunity provided by the NDF market lies in increasing liquidity access for the buy side, as well as other client segments, who have traditionally faced challenges in accessing deep liquidity in the NDF market, according to Matt DellaRocca, global head of liquidity, LMAX Exchange. “By providing a trading environment that offers greater transparency and efficiency, liquidity improves, driving tighter bid-offer spreads, reducing trading costs and therefore attracting more participants to the market. This, in turn, creates a more competitive environment for all market participants,” says DellaRocca. 

“The growth of electronic NDF trading will drive volumes higher as liquidity expands. This is particularly important in emerging markets. The evolution of trading technology also plays a key role, as it enhances price discovery, improves the market and allows for more precise execution, making NDF trading more accessible and efficient,” adds DellaRocca. 

The demand for NDFs is increasing rapidly due to several factors, including the growing need for hedging in emerging markets and electronification, says DellaRocca. “NDFs are particularly popular in regions with currencies that are not freely traded, such as those in Asia and Latin America. Institutional investors are seeking ways to manage currency risk more effectively which has led to increased interest in NDFs.

“While the move toward electronification of NDF trading is slower than anticipated, we are addressing this by expanding liquidity offerings, particularly through initiatives like the launch of the LMAX Exchange Singapore (SG1) NDF matching pool. This move highlights the importance of Asian NDFs and our commitment to enhancing liquidity for not only banks but also the buy side, aiming to boost market depth and facilitate broader participation,” says DellaRocca. 

There is also growing demand for NDF algos from the buy side and real money clients as institutional investors increasingly seek efficient ways to execute large NDF trades with minimal market impact, says DellaRocca.  However, the adoption of NDF algos has been slower than expected due to the limited availability of NDF liquidity pools and the underdeveloped nature of algo execution in this market. 

“While the buy side is keen to use algos for better execution, the lack of deep liquidity and the complexities of trading make algorithmic strategies more challenging,” says DellaRocca. “To address these challenges, we are focused on enhancing NDF liquidity and collaborating with banks to build deeper, more reliable liquidity pools. By improving the liquidity available for algo execution, we aim to make NDF trading more efficient and accessible for our clients. This collaborative effort with the banks is essential to overcoming current hurdles and driving the evolution of NDF algo trading.”

To facilitate further electronification of the market, there needs to be a concerted effort to build deeper liquidity pools and enhance algorithmic offerings from the banks, says DellaRocca. “To address current challenges, we need to expand market participation, improve the infrastructure for better trade execution and ensure that liquidity is more accessible and transparent. As liquidity pools deepen and algo execution improves, firms will experience reduced execution costs, tighter spreads and faster trade execution. Ultimately, electronification and addressing the above will lead to better price discovery and increased efficiency in NDF trading, making it more cost-effective.”

DellaRocca believes the future of NDFs is incredibly promising, with significant growth potential driven by continued advancements in technology, liquidity improvements and evolving market dynamics. “The demand for NDFs will continue to grow, as institutional investors seek more efficient ways to manage currency risk in emerging markets. We are already seeing heightened interest from the buy side, and as liquidity pools deepen and algorithmic execution becomes more sophisticated, we will see even greater adoption of NDF trading. This will benefit all market participants,” he says. 

“Looking ahead, several developments could further unleash the potential of NDFs. Firstly, regulatory clarity will be key. As regulators around the world continue to adapt to the growth of electronic trading, ensuring a consistent and transparent framework will be critical to broader market participation. Secondly, the ongoing evolution of technology will play a vital role in driving efficiency. Lastly, the nature of global markets—particularly in Asia and emerging economies—will continue to push demand for NDFs.”

EM economic convergence

The adoption of electronification has been an important factor in the growth of the NDF market. But what has driven this adoption? According to Andrea Sanna, head of liquidity management at London-based FX broker Alp Financial, a significant driver of this change has been the convergence of emerging market economy (EME) currencies towards that of developed economies in one important dimension, that is the participation of “non-residents” in their trading activity. 

“As per the 2022 BIS Quarterly Report, in the early 2000s trading with non-residents accounted for a limited portion of FX activity against Emerging Markets currencies if compared to the portion relative to developed countries where USD or EUR see the predominance of their traded volumes exchange by and between non-residents,” says Sanna.

However, by 2022, FX trading activity in Emerging Markets currencies was predominantly with counterparties abroad. “This pressure on the internationalization of EME currencies and in particular NDFs facilitated electronic trading and central clearing, quickly catching up with other emerging market derivatives. This shift has been driven by growing demand for greater transparency, regulatory changes aimed at reducing counterparty risk, and technological advances,” says Sanna.

Central clearing, once limited in this space, is also becoming more prevalent as firms look for safer and more efficient ways to trade, says Sanna. “Electronic trading platforms are also gaining traction, offering real-time pricing and streamlined execution, which reduces costs and makes the market more accessible. The above changes implied that Emerging Markets structures in FX are quickly catching up with those of developed countries and increasingly looking like their more developed counterparts in particular in terms of locations where they can be exchanged, products offered, and the counterparty mix participating in their trading activity. Last but not least, innovations in post-trade processing are transforming the NDF market into a more efficient and robust ecosystem minimizing settlement risk.”

Trading NDFs presents unique regulatory challenges due to inconsistencies in rules across jurisdictions, particularly regarding clearing, margining, and reporting requirements, says Sanna. “These differences create complexity for global participants, leading to increased compliance costs and operational burdens. The lack of standardization in pre- and post-trade transparency further fragments liquidity, complicating execution and impacting pricing.”

Regulatory uncertainty and varying interpretations of rules can discourage participation, reducing market depth and efficiency, says Sanna. “For investors, these challenges need a careful balance between compliance and strategy optimization. Tailored risk management, efficient collateral use, and collaboration with technology providers are critical to navigating these hurdles while maximizing execution outcomes and maintaining a competitive edge.”

To further facilitate electronification in NDF markets, continued investment in infrastructure is needed to enhance liquidity, improve platform inter-operability, and ensure standardized data formats for correct trade execution, says Sanna. Regulatory clarity around electronic trading and central clearing will also play a crucial role in fostering its adoption. 

“Expanding access to real-time data and improving risk management systems will enable more accurate pricing and quicker decision-making. As electronification deepens, trading firms will benefit from increased efficiency, reduced operational costs, and better risk control. Real-time execution and transparent pricing will also enhance liquidity, leading to tighter spreads and greater market access, ultimately improving profitability and reducing counterparty risks.”

According to Sanna, the development of emerging market FX will centre on four main areas – increased access to foreign institutional investors; increased adoption of electronification in regions outside of Asia; an increase in overall trading activity of NDFs and in FX volumes compared to local GDP; and the continued fragmentation of emerging markets FX due to the relationship between onshore and offshore, driven by the existence of capital controls.

Upholding growth

Singapore Exchange (SGX)’s FX business has seen a 50% year-on-year increase in terms of NDF trading volumes, reflecting favourable market dynamics, client acquisition efforts, and the development of curated liquidity pools, says Vinay Trivedi, CEO at SGX CurrencyNode.   But despite the substantial growth, NDF volumes still trail behind other FX products like swaps and futures in terms of total volume. 

For instance, the ADV for FX futures is approximately $125 billion. In addition, FX swaps dominate global FX markets, accounting for roughly 49% of total turnover, while NDFs represent a much smaller portion of the market. Despite this, the role of NDFs has expanded, particularly in emerging market currencies. In specific regions, such as the Indian rupee (INR), Korean won (KRW), and Taiwan dollar (TWD), NDF volumes can surpass spot market volumes, underlining their growing importance in markets with capital controls or currency convertibility restrictions.

To uphold growth in the NDF market, several key areas must be addressed, says Trivedi. “First, upgrading technology infrastructure to support advanced workflows such as RFQ, RFS, and streaming is essential. These improvements will enable seamless global connectivity and enhance data flow, driving better real-time execution, liquidity, and market depth. Then, overcoming liquidity and market structure challenges is crucial. The NDF market remains fragmented and broadening the adoption of comprehensive electronic FX solutions such as MaxxTrader, among tier-2 and tier-3 banks is key to increasing liquidity and improving transparency,” says Trivedi. 

“Additionally, standardising clearing processes and enhancing settlement mechanisms will help streamline operations and foster deeper liquidity pools. Regulatory clarity is also critical for further adoption of electronic trading platforms. Simplifying capital and margin requirements and providing clearer regulatory guidance on NDF products will encourage broader participation, particularly from smaller or emerging market institutions. Lastly, integrating algo trading to handle larger trades efficiently while minimising market impact will improve execution quality. Developing bespoke algos that account for the unique features of NDFs, such as broken dates and non-standard maturities, will enhance pricing accuracy and market efficiency,” says Trivedi. “Addressing these areas will accelerate the electronification of NDF markets, creating a more efficient, liquid, and transparent environment.”

Assuming there continue to be advancements in regulation, technology and market dynamics, the future of the NDFs market looks promising, says Trivedi. “Regulatory changes have had an impact, notably Uncleared Margin Rules (UMR) which have increased the costs and complexity of managing uncleared transactions. This has led to one key result of UMR which is the shift towards clearing NDFs through central counterparties (CCPs) to mitigate costs associated with uncleared trades. Additionally, some participants are opting for cleared FX futures and options as alternatives, given the cost-effective advantages they offer compared to uncleared NDFs.”

NDFs are also facing growing competitive pressure from the futures market, which benefits from several key factors, says Trivedi. “Regulatory changes, particularly UMR, have made uncleared OTC products like NDFs more costly, while futures contracts—standardised and centrally cleared—offer a more cost-effective alternative. Futures markets also attract buyside participants due to their superior liquidity and transparency, further challenging the growth of NDFs. Despite this, NDFs retain their critical role in markets with non-convertible currencies, where futures contracts may not be viable. In these markets, NDFs remain essential for currency risk management,” says Trivedi. 

As regulatory frameworks evolve, there is a growing focus on increasing transparency and reducing systemic risk, says Trivedi. And on the technology front, the electronification of NDF trading, coupled with the use of advanced algos, is driving improvements in market accessibility, liquidity, and efficiency. “This shift is helping streamline execution, enhance price discovery, and foster a more dynamic, transparent marketplace for NDFs. Finally, market dynamics in emerging markets with partial currency convertibility are expected to keep NDFs in high demand. As infrastructure improves and onshore institutions participate more actively, NDFs will continue to play a key role in global currency risk management,” says Trivedi. “Overall, the future of NDFs is bright, with regulatory clarity, technological innovation, and growing market participation set to enhance liquidity, efficiency, and market integration.”