THETRADETECHFX DAILY market review
The
Market Review : electronification of NDFs
In the UK , the Bank of England reported record highs for NDF turnover in its latest semi-annual FX turnover survey , with a 7 % increase in NDF trading compared to October 2021 . Longer term , the central bank noted that NDFs had also seen the largest relative increase by instrument since April 2016 after rising 125 % to $ 136 billion . The impending release of the latest BIS Triennial Central Bank Survey of FX and Derivatives Market Activity will provide a more global overview of the trend in NDF growth , with the 2019 report having highlighted that NDFs accounted for a “ significant share of the increase in trading ” since 2016 within the outright forwards category .
Yet NDFs continue to be regarded as a relatively nascent sector of the FX market , with even the BIS having only started collating NDF data for its 2013 Triennial FX survey and still only a small number of the leading FX platforms reporting specifically on their NDF turnover . Changes on the regulatory front , however , could potentially accelerate the uptake in NDF trading . The final phase of the Uncleared Margin Rules ( UMR ), which came into force on 1 September 2022 , will significantly impact more buy-side firms than the previous five phases , with the threshold of uncleared OTC assets having dropped from the previous level of $ 50 billion down to $ 8 billion . Previous phases had already seen evidence of more firms turning to NDF clearing to optimise their balance sheets , according to analysis from post-trade service provider OSTTRA . The first half of 2022 saw NDF clearing volumes on OSTTRA ’ s FX clearing platform increase by just over 30 %, with each phase of UMR said to have correlated directly to volume growth .
Meeting the demand with NDF algos In addition , the standardised approach for counterparty credit risk ( SA-CCR ), which was introduced at the start of the year , may potentially prompt more FX dealers to weigh-up NDF clearing . A growing push to demonstrate adherence to the FX Global Code of Conduct might even promote further NDF uptake by increasing transparency . Clearing NDFs aligns well to the principles and aims of the Code , while a couple of key platforms which offer NDFs , such as 360T , have recently made changes to allow only signatories to the latest version of the Code ( or market makers offering firm liquidity ) to make prices anonymously .
Perhaps even more significant to the growth of NDF trading has been the development by
“ NDF trading is a complex process , but if these challenges can be overcome , it will provide FX traders with more opportunities for sourcing liquidity .”
The pace of growth in non-deliverable forwards ( NDFs ) has been slow and steady at best , but the past year may have finally seen the long-awaited shift to the more widespread adoption of NDF trading . NICOLA TAVENDALE takes a look at the landscape .
leading banks of NDF algo trading strategies , with a number of new providers also having entered this space over the past year . WBR Insights , in its latest buy-side FX trading report ‘ Navigating crypto , turbulent markets & ESG ’, found that while only 8 % of FX trading desks have already adopted NDF algo execution , an additional 27 % said they were planning to implement them in the next six months . Nearly half of the respondents were also evaluating NDF algos with their counterparties , but said they have no immediate plans to adopt them , indicating the potential for further growth .
Balancing the benefits Improved market transparency was perceived to be among the most important impacts of NDF electronification , with 70 % citing this as one of the three key benefits . In addition , reduced trading costs and the ability to reduce operational risk were also said to be important to FX trading desks . Improved execution efficiency and the ability to generate greater returns also ranked high among the benefits chosen , while accessing new liquidity was the least significant factor , at 34 %, which was due to liquidity originating from clients wishing to sell , not from algos or other technology , according to the report .
Commenting on the findings , Elke Wenzler , head of trading at MEAG , noted that her firm had a lot of success in their employment of NDF algos , adding that they were especially
24 THETRADETECHFX DAILY