Vivek Shankar

The road ahead: What does 2022 hold for e-FX?

December 2021 in Market Commentaries

As yet another year draws to a close, the institutional FX markets continue to pose interesting questions. New regulations have caused changes in the markets, while technology has prompted others. As with everything else in 2021, the COVID pandemic has affected the FX markets, and participants have dealt with the ramifications. so what is in store for e-FX in 2022? Vivek Shankar outlines a few important trends that market observers and experts will be keeping an eye on.

Trading platform developments

Technology has changed the way firms trade FX. While voice broking still exists in significant numbers in the swaps and NDF business, spot is almost entirely electronic. The electronification of swaps trading has produced heated debates, with more than one service provider taking a shot at introducing solutions for mid-market risk exchange. ECNs and MDPs have faced their share of challenges over the last three years. Russell Dinnage, Head of the Capital Markets Intelligence Practice at GreySpark Partners, points out that non-bank liquidity providers have encroached on business traditionally executed by ECNs and MDPs.

“Non-bank liquidity providers are seeking to broaden their capabilities in non-spot / forward markets to accommodate the increased complexity of buy-side firm client hedging demands,”

Russell Dinnage

“As a result, where once the concentration of liquidity on the largest MDPs was highest in a small number of spot / forward currency pairs,” he says, “the medium-term trend now appears to be a shift away of overall trading volumes from the largest MDPs.” 

The issue at heart is the liquidity aggregation capabilities offered by MDPs. While MDPs spread price knowledge of major currency pairs, they fail to distinguish between genuine LPs and intermediaries. Thus, liquidity knowledge is limited, and Dinnage points out that increasing buy-side demands have led to a shift.

“Non-bank liquidity providers are seeking to broaden their capabilities in non-spot / forward markets to accommodate the increased complexity of buy-side firm client hedging demands,” he says. “At the same time, those same buy-side firm clients are continuing to acquire their own liquidity aggregation capabilities and the ability to standardize market data and trade data into FIX.”

The result is the diminished importance of a single MDP to concentrate liquidity, and Dinnage expects this trend to continue into 2022.

Portfolio managers are using analytics to derive insights that form actionable intelligence

The rise of TCA and analytics

As technology improves, market participants are demanding greater transparency and insight into their execution patterns. Buy-side firms are particularly driving this demand as they seek to lower costs. Portfolio managers are using analytics to derive insights that form actionable intelligence. Dinnage points out that a desire to automate is a driver behind this trend. “These portfolio managers, in effect, want to get closer to performing the trade execution decision-making function without being directly responsible for execution workflow and process,” he says. The intent is to replace a manual execution desk with active trade analysis and decision-making abilities at scale and low latency.

Technologically, this is a tough goal to achieve. How can service providers pivot to account for this demand? Dinnage says, “What would make a difference in this challenge would be growth in the use of graph databases for market/trade data analysis and the more widespread use of Websocket APIs as opposed to simple FIX APIs. The combination of these two technology components could result in a step-change in FX pre- and post-trade TCA.”

However, he points out that whether asset and investment managers are ready to experiment with these technologies is up for debate. For now, technology providers will have to work to convince clients of the advantages of new solutions.

Market Structure evolution

Transparency is the need of the hour in the FX markets as more participants begin demanding it. The adoption of the revised FX Global Code will have an impact in this regard. Other developments are catching market observers’ eyes.

Clearing, or the lack of it, in FX is a persistent debate. Vinod Jain, Strategic Advisor at Aite-Novarica, points out that “FX clearing is not mandated and thus clearing percentage at gross level is ~ 4%and  most FX market trades last for less than a year, unlike interest rate swaps. He also highlights that due to the nature of the FX market there are challenges if clearing is to become a reality.

Audrey Blater, Research Director at Aite-Novarica Group, highlights the rise of peer-to-peer trading and the evolution of credit versus liquidity, amongst other things. “The delineation of liquidity and credit is evolving. I like that there are platforms solving for an issue like rolling FX hedges – a burdensome task for banks that doesn’t add value,” she says. “I can see more add-on services in areas that used to be tied exclusively to the execution and aggregation of liquidity,” she continues. “Even beyond the provision of credit – as tier two/three banks look to offer more tech and services to their clients and increase revenues.”

“I can see more add-on services in areas that used to be tied exclusively to the execution and aggregation of liquidity,”

Audrey Blater

“The establishment of CLS for Payment versus Payment flow, oversight by central banks and prudential regulators are the challenges to overcome for clearing to occur.” It is a view with which Blater agrees. “I am not sure mandatory clearing of very short duration securities will happen,” she says. “There is a cost to clearing as well so there must be the right balance when choosing to clear versus not.”

“For some firms, it will simply not make sense. That said, if there were mandates, I can envision exceptions based on volumes or other criteria.” Blater and Jain also point out that one of benefit of clearing is cleared trades are not in scope of the uncleared margin regulation (UMR) regulation. However, these benefits have to be balanced with the hurdles that they have pointed out.

Prime brokerage and algorithmic trading

The Prime Brokerage market is also set to further evolve in 2022. Jain points out that following the Archegos Family Fund debacle, “client onboarding, client due diligence and client portfolio migration to prime services is a challenge.” He believes PBs will expand their services to capture more of the NDF and OTC trading market while offering outsourced FX trading services.

“Trading and investing in crypto will increase in the institutional FX marketplace”

Vinod Jain

Algorithmic trading is ubiquitous in spot these days and is making a mark in other markets as well. Blater believes that the pandemic had a significant role to play in this development. “The COVID-19 pandemic increased reliance and experimentation on algos and other forms of automation,” she says.
“This was good for algos and good for the buy-side since lower-value trades could be executed in this manner rather than spending precious desk resources clicking away and calling up banks.” She believes this trend will continue as buy-side firms look to consolidate resources.

Jain and Blater also believe that algos will continue permeating products like NDFs. Jain says, “As FX algorithms increase in complexity, the primary benefit of using these algos is limited to bilateral trading. Of course, surveillance of algo trades and tracking changes in algo behaviour will always be a challenge.”

Next-Generation technologies

As market structure evolves, technology is responsible for many of these changes. Until now, the common view was that a lack of technical maturity was holding back many solutions. However, Medan Gabbay, Chief Revenue Office at Quod Financial, believes this picture has changed.

“We are seeing 2022 as a period where many long-standing technologies are finally maturing to the point of mainstream use. Technologies such as AI/ML in execution are now becoming much more common in trading workflows, particularly for clustering, market predictions, pre-trade parameter selection, and pre-trade TCA.”

AI and ML have huge implications for firms looking to optimize their workflows. Gabbay highlights execution improvement as a promising use case, along with many middle and back-office processes.

Aside from a perceived lack of maturity, security and data integrity have also been pushed as possible hurdles for technological service providers to overcome. Gabbay agrees that some unique characteristics of FX markets prevent adoption. “The high concentration of service providers, low latency requirements, and the lack of specific technology to aid performance are the most common challenges,” he says.

However, he believes some benefits outweigh the drawbacks. “Cloud technologies are secure and reliable enough for adoption in capital markets.
The breadth of medical, government, and other sectors who use these services are far-reaching and in areas such as retail trading, there are significant advantages to Cloud Deployments.”

No talk of next-gen technology is complete without spotlighting distributed ledger technology or DLT. DLT holds many advantages, for example with its potential for reducing settlement/clearing times by moving T+2 to instantaneous settlement (as little as 30 minutes).

“We are seeing 2022 as a period where many long-standing technologies are finally maturing to the point of mainstream use.”

Medan Gabbay

However, Gabbay is careful to temper the hype around it while acknowledging its benefits. “I think as a counterpoint to the hype around DLT, it is also important to understand its limitations.”

He points out that in DLT, trading and settling simultaneously occur. This hugely increases execution times despite instantaneous settlement and can result in large losses for trading firms. “While this is a made-up example, it is important to recognize that there are hidden impacts to these technologies which may reduce their adoptions versus the headline improvements,” Gabbay notes.

Despite this, the likes of DLT adoption and automation throughout the trading workflow are bound to increase. “We also see significant investment in multi-asset trading technologies to squeeze benefits out of cross-asset cross desk trading capabilities, which accounts for the rise in the non-bank market makers such as XTX,” says Gabbay.

COVID-19 has increased reliance and experimentation on algos and other forms of automation

Market fragmentation

The Bank of International Settlements 2019 Triennial Survey highlighted that FX was an increasingly fragmented market. A greater mix of market participants with diverse transaction and liquidity needs has blurred traditional lines. Electronification has increased this phenomenon to a large extent.

GreySpark’s Dinnage observes, “There was a shift among FX multi-dealer platforms from multi-tier to single-tier markets in 2021. Fit-for-purpose vendor-supplied order and execution management systems continue to proliferate as the underlying technology becomes more commoditized and new venues focused on all-to-all trading emerge.”
Dinnage also points out that the role of non-traditional liquidity providers in the flow FX market “is both driver and passenger” in market transformation.

While diverse investment objectives have played an important role in market evolution, the BIS working paper highlights the recovery in PB activity after 2016 and volatility levels of USD interest rates as key factors that have boosted demand from non-traditional liquidity sources.

Observers expect these trends to continue in 2022 as electronification further disrupts manual trading workflows.


Regulation has done a lot to change the way the FX markets operate. Dodd-Frank targeted many lines of business in trading operations and spot FX was heavily impacted. While the effects of those regulations are receding, another challenge looms on the horizon. Phase six of Uncleared Margin Rules (UMR) is set to hit the markets in 2022, and it will undoubtedly create significant changes to operational workflows.

Phases one to four of UMR targeted relatively larger firms with the resources to cope with new requirements.

Phase five kicked in in September 2021, and firms are dealing with the resulting challenges. Market observers have long speculated that Phase six will be the most challenging due to the relatively small size of the firms targeted. From the calculation of IM requirements to determining collateral value, firms under Phase six’s scope face significant resource challenges. While work is underway, via electronic solutions to simplify workflows, it remains to be seen how the markets cope.

Elsewhere, the GFXC released an updated version of the Global FX Code and guidance regarding Last Look and Pre-Hedging, both contentious topics in the FX world. While a positive step, market participants seemingly wanted more from the GFXC regarding Last Look. 

Aite-Novarica’s Jain explains, “Out of all the FX Code Principles, the Principle of Confirmation and Settlement offers the most advantage and is the most realistic.” Jain points out that ideally, the revised code should have provided deeper guidance about how firms could achieve their aims.

“Unless there are practical solutions adhering to these principles, the Buy-Side will implement internal projects as they deem fit and only slightly address the FX code,” he opines. Thus, despite the positive steps taken by the GFXC, it remains to be seen how market participants go about adopting its principles.

New trading styles gather pace

As the FX market has welcomed more participants, execution and trading methods have evolved. These days, peer-to-peer order matching has risen in popularity. Jay Moore, Co-Founder and CEO of FX Hedgepool, believes there are several reasons for this.

“Peer-to-peer has been of long-standing interest to the buy-side for a variety of reasons,” he says. “The focus on TCA, an evolving regulatory landscape, cost pressures, and the heightened awareness around the various costs of execution that go beyond price has caused the buy-side to search for new and different ways to access liquidity, including among peers.”

The buy-side has always been concerned with information leakage and enabling the sell-side to monetize their order flow: An issue that is particularly concerning for large, predictable trades like passive hedges. Peer-to-peer naturally protects buy-side order flows and helps firms fulfill their liquidity needs without compromising sensitive information.

This model also fulfills the buy-side’s need to transfer risk fairly and transparently with a naturally offsetting peer group – something that might be at odds with the current market structure where the sell-side’s primary motivation is earning a trading profit.

While the benefits are huge, there are challenges. “Among all of the buy-side discussions we have had around peer-to-peer in general, there are two primary objections – pricing and integration,” says Moore. “The true cost of execution is often hidden behind the fact that the very rates against which a trade is measured in TCA reports are skewed by the impact that their trade has already had on the market.”. Peer to peer eliminates market impact altogether, which is a big win for best execution.

“Peer-to-peer has been of long-standing interest to the buy-side for a variety of reasons,”

Jay Moore

Moore adds, “As with any new technology platform, integration and automated workflows are a central focus. Being small and nimble allows firms like us to achieve 10x innovation velocity, which means we’re able to evolve in an order of magnitude faster than larger, more established providers. Technology is enabling positive change at speeds never before possible”.

Those considering peer-to-peer may be concerned that banks – due to the fear of disintermediation – could be less willing to provide support for trades in other instruments or markets. “As such, some buy-side firms may feel that the negative impacts on their bank relationship outweigh the benefits of the P2P liquidity,” says Moore. He points out that solutions like FX HedgePool go a long way towards removing these concerns by including the sell-side as part of the solution.
A major obstacle to adopting peer-to-peer at the institutional level has been the tight coupling between liquidity and credit. To resolve this impasse, FX HedgePool developed a unique unbundling model for swaps that separates liquidity from credit. This allows peers to match positions with each other and keeps banks central to the booking and settlement requirements of trades under existing bilateral credit terms – allowing banks to gain market share through balance sheet usage rather than pricing.  The model appears to be gaining interest from both sides of the market.

Thanks to its advantages and challenges, peer-to-peer matching remains a point of interest as we head into 2022.

CBDCs, Cryptocurrencies, and Digital Assets

Blockchain adoption is growing, and cryptocurrencies have hogged the spotlight in retail markets. However, institutions began adopting Bitcoin and other cryptos en masse, and these alternative currencies are now considered assets in their own right. Add to this the rise of NFTs and Metaverses, and it is tough to predict how FX will experience an impact. The rise of Central Bank Digital Currencies (CBDCs) further stirs the pot, with China being particularly aggressive in pushing its Digital Yuan.

Asset tokens are making a mark in other institutional markets, for example JP Morgan’s JPM Coin is currently used to execute tri party repo transactions. Will there be a similar use case in FX? Aite-Novarica’s Jain predicts increased activity in this market in 2022 and years to come. “CBDCs, stablecoins, and crypto adoption will gather pace in 2022. Trading and investing in crypto will increase in the institutional FX marketplace.” However, given that these assets are relatively new, he foresees a few challenges. Central to these is an institution’s ability to integrate digital assets into everyday workflows. “Digital assets’ use cases look promising in a silo but integrating them within the current infrastructure will be a challenge,” he says. “The ones with a realistic business case will see more success and adoption.”

While the impact on FX might be tangential or workflow-related, there is no doubt that the crypto wave will impact FX markets.

Attention is now turning to Central Bank Digital Currencies (CBDCs)

Will COVID produce a hangover?

No discussion of trends these days is complete without talking about COVID and its aftereffects. While the common mainstream narrative has been the “hangover” caused by COVID as the world bounces back to a relative normal, the FX markets were strangely insulated.

GreySpark’s Dinnage explains, “I wouldn’t say that COVID produced a hangover in the FX markets. As ever, even as was the case during the financial crisis, currency markets continue to function properly, unperturbed by global events.”

The biggest effect COVID had was slowing down the rate of electronic adoption amongst traders. Thanks to being forced to work from home without full access to sophisticated tools, relationships became extremely important, and voice-trading filled that gap. There’s another aspect to the relationship theme that Dinnage highlights.
“The annual conference circuit has shifted online now, and a lot of conference providers have gone bust,” he says. “These conference events are important annual milestones in the FX industry, in particular, as it is still fundamentally a relationship business. I don’t see in-person conferences bouncing back any time soon.”

Exciting times ahead

As with everything to do with FX, no one can predict what lies ahead with complete accuracy.

However, there is no doubt that the changes afoot will leave a lasting impact on the industry so it remains to be seen how these trends develop and affect the markets evolution.