FX Markets Asia Awards 2020: Best FX exchange – Singapore Exchange

High volatility and liquidity in FX markets caused soaring demand for risk management and record trading volumes when the Covid-19 pandemic struck. KC Lam, head of rates and FX at Singapore Exchange, describes how the firm avoided disruption as the global economy locked down, the advent of uncleared margin rules, the spurring of interest from the buy side in a new USD/INR  futures contract, and the future direction of FX

How has SGX responded to the market conditions we’ve seen this year?

KC Lam, Singapore Exchange: At the start of the year, the market shock from the pandemic created significant volatility and we saw record trading volumes – which you might expect – due to higher demand for risk management. 

However, we also saw a very interesting flight to quality, at least for exchange-traded FX. When liquidity went missing and prices were gapping, we saw more volume coming to us because we have liquidity on a continuous basis all the way to closing of US hours, and we’re told by clients that we demonstrated deeper liquidity in Asian currencies compared with the over-the-counter (OTC) market. So that was an interesting data point.

Another interesting sign of the high liquidity in our market was demonstrated by the fact that the cost of rolling from one position to the next, even in March, only increased marginally despite the high volatility. One would expect the cost to have increased much more but, on the contrary, we saw continuous pricing and, despite the challenging environment, the cost of trading remained low throughout.

 

You piloted a new futures product last year. Have clients welcomed that, given the volatility?

KC Lam: Yes. Counterparty risk can be heightened in an uncertain environment, as we experienced in March. Concerns around counterparty credit and market risk will drive more risk management to exchanges. With our FlexC FX contract, we can replicate OTC FX in the futures format with a fully customised expiration date. Since piloting it last year, we have traded over $550 million notional, demonstrating a real customer use case and proving that it works.

Customers appreciated the fact that they can trade customised FlexC FX dates and be able to close out positions with different counterparties.

It’s like an OTC bilateral trade – it is mutually agreed and then sent to us for clearing. However, we have heard from market participants that they would like to have a venue to trade it so they can source prices, liquidity, and so on. We are in the process of looking into that.

 

You bought cloud-based FX trading platform BidFX this year. Would that be a potential venue?

KC Lam: The future of FX lies in the ability for our clients to benefit from price discovery, liquidity and transparency for both OTC and listed futures trading, in a single unified venue, which is what we hope to achieve with BidFX. Bringing together both pools of liquidity would open up access to all types of FX instruments – forwards, swaps, non-deliverable forwards (NDFs), futures, and so on – all on a common customer or client interface. 

Having BidFX as a venue that can support FlexC and standard FX futures supporting common workflow will certainly be something the market is keen on. FlexC FX futures are designed to be platform-agnostic. We also have interdealer brokers that are interested in putting it on their platform so they can match trades between their customers and send it to us for clearing, and we welcome that.

 

Could FlexC could become even more attractive under the uncleared margin rules (UMR)?

KC Lam: Definitely. FlexC FX futures was our first solution offered to clients to help them manage UMR. Phases five and six of UMR have been pushed back a year, so we’ll start phase five in 2021, but there isn’t really a lot of time remaining. The phase five calculation period starts around March to May 2021, and phase six from June to August. Participants need to factor in the additional time needed to effectively seek out operational workflows and efficiencies across the business. 

What this regulation means is that there will be increased costs of trading. One way to mitigate these costs would be to send trades for clearing, but a better way to resolve it would be to trade using a futures format because you only need a one-day margin period of risk, resulting in substantial cost savings compared with either bilaterally cleared or bilaterally uncleared trades. FlexC Futures would be a good way to unlock these savings, while allowing our clients to retain bilateral trading relationships.

 

You’ve talked about how the turmoil this year affected markets, but how did it affect you operationally?

KC Lam: That is a good question. We definitely saw a flight to quality on the trading side but, although some market-makers initially had operational issues and issues participating in the market, we did not experience any major disruption. Many of them were quick to put their business continuity plans into action, which saw them split into teams so they would cut back on trading hours. 

All in all, liquidity held up very well even during March to May, and in the period of extreme volatility, we saw large gains in volume market share. For instance, SGX FX futures volume rose above S$171 billion in March, which was up more than 70% year-on-year. We also maintained our market share for key products, including having the largest global market share in INR/USD futures – more than 60%. For renminbi futures, we had a market share of more than 80%.

 

What is on the horizon for SGX in 2021?

KC Lam: We are launching a new USD/INR futures product that would allow NDF market participants to trade listed Indian rupee futures in the OTC format [USD/INR quote format]. This new Indian rupee futures contract – to be launched on November 23 – is denominated in US dollars, with international monetary market expiry similar to the OTC format. We are seeing a lot of interest from buy-side customers. 

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