Neill, please give us a brief overview of how the LSEG business is structured and the comprehensive suite of trading platforms, data and compliance tools that it offers to FX market participants?
Within the Capital Markets division we have two trading venues: Matching and FXall. FXall helps customers trade with their banks, while Matching enables banks and other market makers to trade with each other. Matching plays an important role in the structure of the FX market, it has primary market status and as such, it is trusted by the industry for price discovery and for reference data. Matching also feeds into the WM/R benchmark (the 4pm fix), an industry standard benchmark trusted across the global FX community. This sits in our Data & Analytics division, which also boasts Workspace. Workspace provides customers with news, market data across all asset classes, and analytical tools to inform their trading decisions.
Looking more broadly, part of LSEG’s Data & Analytics business distributes real time and non-real time data to banks and buyside participants globally. It is the pre-trade information our customers need to help them understand where the market is, formulate their trading strategies, and be able to trade at the right time. This takes customers to FXall and Matching, where they can complete their trades. Finally, LSEG’s Post Trade division includes LCH ForexClear, a market leading clearer of NDFs which has also recently started clearing FX options and FX swaps.
Some of the linkages between these services are more established than others, and some we’re working on as the FX market evolves. There is a clear link between our desktop and trading venues, with orders going through our FX trading desktop to our trading venues. Our desktops give us a notable footprint in the market which attracts unique liquidity into our venues. In turn, the venues being more liquid creates better market data, which makes our market data more relevant to our customers.
We’re also improving connectivity between our trading and clearing services. Last year, we announced FXall is expanding traders’ access to cleared workflows for FX OTC trades by building connectivity to LCH ForexClear, enabling customers who have traded on FXall and wish to clear on LCH ForexClear to have their trades sent through automatically. As LSEG matures and the market evolves, we will find more of these connections because we understand the importance our customers place on well-designed end-to-end solutions.
What do you see as the biggest challenges currently facing the FX market and where will the industry find the solutions to them?
There are two key challenges – ‘something old’ and ‘something new’. The ‘something old’ is the continued industry focus on moving towards greater automation, driven by a number of factors. The pressures on our customers to trade with less risk and more efficiency continue unabated, while the impact of the pandemic has increased the demand for greater automation.
With most small tickets automated, the challenge facing the industry now is to automate the big tickets. Algos are the solution the market is moving towards. This introduces additional hurdles to overcome such as how customers can fit algos into their trading workflows and how to ensure they can control what the algo is doing if market conditions change during its execution. This is something we are currently working on, looking for solutions that work uniformly across all the algo providers that a given buyside customer may use.
The ‘something new’ is that for the first time in a long time, the foreign exchange market has become volatile and interesting. Central Banks are starting to raise interest rates, they’re not coordinated in their increases, and currencies are starting to move. For many customers, particularly on the buyside, paying attention to FX risk and FX hedging requirements is going to be more important than it has been in previous years. We expect to see a growing interest in FX hedging solutions and a greater need on the part of many buyside participants to hedge more fully than they have been doing in the past few years.
You have said in the past that regulation is the key enabler for moving markets forward. In what ways can you see those involved with designing and deploying technology working closer with regulators to help the FX global community to evolve and tackle future challenges?
This can be seen more clearly in emerging markets, particularly in Asia. Emerging markets have embarked on their regulatory reform processes, especially for e-commerce, later than in Europe or the US. Therefore, there are already examples of reform in place and these countries are in a position where they can pick and choose which models are best suited to their local markets. They can also work with infrastructure providers, such as ourselves, to accelerate their country’s adoption of new technologies that support adherence to the new regulatory regimes, and thereby drive increased efficiency and market modernisation.
For example, Indonesia is currently moving through a process of regulatory transformation. We are working with Bank of Indonesia and the local market to support and facilitate this effort. Last year we launched Matching and we are now in the process of incorporating a new legal entity in Indonesia as required by the new regulations. It is a good example of how regulators are able to work with infrastructure providers to ensure the needs of market participants are met as the regulations go-live. These changes will facilitate the development of electronic FX trading in Indonesia. More broadly, this process is going to recur in other countries in Asia over the next decade as increasing numbers of countries undertake a process of regulatory reform.
Our regional spotlight in this edition of e-Forex is focusing on the growth of e-FX in Singapore where Refinitiv recently launched NDF Matching. Why is this an important initiative for LSEG and how does it fit into your overall growth strategy for Asia?
The Monetary Authority of Singapore (MAS) has been running a programme for the past few years with the goal of establishing Singapore as the centre for foreign exchange execution in Asia. To help achieve this, they created a programme to attract banks, non-bank market makers, and venue operators into Singapore. It’s a strong example of how the public sector and the private sector can work together to build a better foreign exchange market.
NDF trading in Asia is currently under-served in terms of venue providers. Meanwhile, we already have a large presence in Asia and a large desktop franchise, which is why many of our customers asked us to provide our own solution for NDF trading. So we’re particularly excited that with the FX technology renewal now taking place under LSEG’s ownership, we have the ability to step in and serve this part of the market with the launch of our NDF Matching platform.
An important part of our core offering is that this solution will be cleared only. This means all trades on the NDF platform will be cleared via its integration into LCH ForexClear. We believe this is a genuine step forward for the industry. While electronic trading is valuable and clearing is valuable, until now they’ve been separate processes. The addition of clearing into the trading venue itself delivers a cleaner venue in terms of improved liquidity and improved credit efficiency.
It becomes easier for customers to onboard to the venue as they only need to put into the venue the credit they have with their clearing broker, compared with the traditional requirement of setting up individual credit lines with each of their counterparties. There is less administrative work so it’s much easier to onboard. Credit is used more efficiently and accurately because counterparties don’t need to over-allocate truly available credit across those multiple lines, as they do now.
Transparency is also improved: an order that goes into NDF Matching will be visible and available to all market participants. Matching plays an important role in helping price discovery across the industry, and it becomes even more valuable in this case because everybody sees exactly the same market, without filtering due to credit considerations.
A final advantage is that the cost of clearing can be built into the bid-ask spread. This means customers will have a clearer sense of the total cost to execute and clear than previously. Credit in the FX industry has traditionally been under-priced and clearing helps the industry fix this.
NDF Matching is genuinely innovative: there is currently no other cleared NDF platform by a major infrastructure provider in the FX market.
Once the NDF venue is live in Asia, we will start offering other trading capabilities from Singapore. We will be moving certain pairs in Spot Matching, as well as certain pairs in Forwards Matching, into Singapore at the right time. We will also move FX Price Stream to Singapore from its current location in Tokyo.
What plans does LSEG have for re-platforming its FX venues onto its core technology stack and what benefits will that bring?
At the heart of LSEG’s commitment to the FX industry is the re-platforming of our FX venues onto the same technology that LSEG uses to drive the London Stock Exchange and Turquoise. We believe this technology runs around 10 times faster, an order of magnitude performance increase. We started work on re-platforming early in 2021. Our first product release on the new technology stack will be the middle of next year with the NDF venue in Singapore. The re-platforming is expected to be completed by the end of 2024.
It’s an ambitious programme and a very big investment. Customers will see a multiple of benefits, all of which are significant. The most immediate will be this upgrade in performance. Historically, the performance of our platforms has not increased as the markets have gotten faster, and so we have lagged behind. Re-platforming addresses this and moves us to beyond where the FX market needs to be currently.
Re-platforming also gives us a greater ability to add new products and the flexibility to locate venues nearer to where our customers are. These capabilities come together with the new NDF Matching venue in Singapore. Hosting in Singapore will significantly reduce latency for our Asia based customers. This is something we were not able to do with the old technology.
We will also inherit a set of advanced order types and other product features from our services on the equity side of LSEG. We will start by introducing order types such as pegs and discretion orders. Looking further forward, Turquoise has many sophisticated order types for block execution. These are now within our gift as we evolve our venue offering to the changing needs of the FX market.
Re-platforming also simplifies the basics, such as connectivity, for our customers. We can now provide one pipe for all of our customers’ FX execution needs across our multiple technology venues. Our customers face challenges with the costs of integration and maintenance of connections, so being able to make just one connection to access these venues is a huge benefit.
The final benefit is our increased agility. The FX market is constantly evolving and identifying new types of execution that market participants would like to try. Moving to a unified platform built around a modern architecture means we can better facilitate this. We want to be future proof so that as the market evolves and we see new opportunities or our customers have new needs, we will be able to react quicker than before. Our NDF platform in Singapore is a first concrete illustration in bringing together these concepts: it’s a product we’ve never covered before, it’s where we wanted to locate it geographically and we were able to add it into a very busy work stream on an overall re-platforming of all our FX venues.
Can you give an example of how LSEG’s e-FX solutions are helping to solve many of the challenges of fast evolving FX workflows?
The design goal of FXall is to help buyside customers organise and execute their FX trades with their banks. As the market evolves, our buyside customers want to try more sophisticated strategies. However, the plumbing of the industry is very much set in a simple RFQ model at the moment. It’s essentially unchanged from the 1999-2001 period when eFX first took off. The work we’re doing is to help the industry move forward from there. We want to enable our customers to try more sophisticated trading techniques and yet not to fall back into manual trading because the industry plumbing doesn’t support this level of complexity.
For example, we have been working on a new execution workflow called “Forwards First Fixing”. This capability is for customers who want to trade FX Forwards competitively and then give the winner the spot leg to trade at the WM/R fix. The result of that is the customer gets the industry benchmark fix for the spot portion together with best execution on the forward points. It’s a complicated workflow. Our challenge as an infrastructure provider is to do this in a way that doesn’t impact pricing automation and straight through processing. To ensure we deliver the benefits of this workflow without the potential problems, we’ve been working closely with both our buyside customers and our banks. This includes not just thinking through the technology side, but in agreeing protocols so that both counterparties are comfortable with handling the market risk between agreeing the forward points and the fixing time.
We’re very proud of the solution that we’ve developed. It is innovative and will genuinely move the state of the market forward while retaining the full automation that people get from a simple RFQ.
What are going to be the key technology, trading and FX business focus areas for many market participants over the next few years and where will LSEG be looking to make further investments to meet those requirements and to deliver greater value for your clients?
The key trend for the industry continues to be pressure on all industry participants to do more with less. Participants need to address a wide set of challenges. They need to increase their trading profitability; to increase their trading efficiency; to reduce trading risk; to increase their auditability; to get a better understanding of their trading performance; to use increasing advanced trading methodologies; and to adopt new technologies such as algos and clearing. And many need to do all this while spending the same, or less, on their trading desks than the previous year. It’s a lot to tackle, and most of our customers are looking for strong strategic partners to help them.
This is how we organise our thinking, around serving our customers’ needs, understanding the problems they have and developing ways that we can help them. For many of our customers, the priority is to find end-to-end solutions that simplify this complexity and minimise total cost of ownership. Other customers are looking to assemble ‘best of breed’ solutions by buying individual components and integrating them together. Our goal is to be able to serve both types of customer.
Our current re-platforming work is critical to be able to continue serving the FX community. It will enable us to provide our customers with higher performance, simpler trading platforms that continue to evolve with their needs.
Building on top of this new technology, by working more closely with our customers to understand their workflows, we can provide advanced solutions that knit together our capabilities in more tailored ways. I see this as an increasing part of what we can do for our customers going forward. It enables customers to access all the advantages of our innovation, delivered in a way that enables them to easily digest it into their own organisations and workflows.
And finally, I continue to believe that the FX market is an amazing market. The FX community is unparalleled in that it thinks together and works together on a global basis. The FX Global Code of Conduct is a perfect example of this. And most importantly, it’s a vibrant market that continues to grow. We’re very optimistic about the future of the FX market and the value we can bring to it looking forward.
