THETRADETECHFX DAILY from the floor
How have recent regulatory and market changes impacted the restricted currencies landscape? Restricted market currencies have always had nuanced challenges, including a complex array of local regulatory requirements that can complicate FX transactions. A common regulatory requirement across these markets is the mandate to link FX transactions directly to underlying investments in the local market. Some markets have been gradually liberalising their FX regulations and requirements over time. For example, recently South Korea has been making strides to liberalise the onshore FX markets to increase foreign flows. They have extended onshore FX trading to 24 hours, eased regulatory barriers and relaxed restrictions on nonresident KRW transactions, enabling foreign investors to hold and trade Korean assets more freely. Some countries have imposed new practices, such as India changing equity settlement from T + 2 to T + 1( looking to go T + 0 in the near future), that may necessitate INR being prefunded to operate in this market. As settlement cycles continue to change and shorten, it is more important than ever to engage with our custodians, brokers and local regulatory bodies. What used to be a very controlled and stagnant market, restricted currencies are now a rapidly and dynamically changing landscape.
What types of innovation and improvements could be introduced to restricted currency trading to make execution more efficient? Each market is different, so it is difficult to use a single brushstroke or workflow to trade restricted currencies. For active managers with similar trading desks to ours, it would be ideal to have a direct dealing workflow in as many of these markets as possible. A lot of our partners have been actively engaging in this space and conferences like TradeTech FX have provided an essential platform for the buy- and sell-side to collaborate. I think there is a much better understanding today of the gaps in the broader market and the need for a more transparent onshore market. We continue to have conversations with our providers and global custodians to get more transparency into executions, which includes spreads being charged, time stamps, trade away fees and batch processes.
How can transparency be improved in restricted currencies and what knock-on impact will this have on wider FX trading? Since majority of the restricted currency
The next frontier for restricted currencies
The TRADE catches up with NOWARA MUNIR, investment officer, FX and rates trader at MFS Investment Management, to dissect the current state of play when it comes to restricted currencies, spanning regulation and market changes, innovation, and the biggest trading risks.
market is still dependent on custodial workflows and regional bank presence, we need to advocate for improved reporting and more transparency around execution rates and times. Some custodians are able to provide in-depth TCA, while others are still lagging. There is still significant work that needs to be done to improve TCA for restricted currencies and more discussions with custodians around benchmarking and standardisation would benefit trading in this space.
What are the biggest risks that are underestimated when trading restricted currencies? These markets are quite nuanced due to the risks involved. If considering the direct dealing workflow, managers need to be aware of the intricacies such as, they would be responsible for routing any underlying security and account details, and in some cases, ensuring tax implications are managed accordingly. In addition to taking on these additional responsibilities, the manager assumes all operational and execution risk. The process around direct dealing has improved significantly over the last decade in terms of transparency and flexibility but still has challenges. Other execution options have also evolved in these markets as managers look for reliability and increased control across their workflow. Ensuring we have the right information to continue to make informed trading decisions that best suit our client and portfolio needs will continue to be a focus.
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