Part Two: FX in focus as SGX doubles down on multi-asset plan

Continued from Part One on October 17, in which Singapore Exchange’s Lee Beng Hong and KC Lam consider opportunities in foreign exchange and how they fit with the Asian group’s multi-product strategy

“Clearly one of the big pillars within our global markets division is the SGX FX vertical which offers a gateway to the global FX ecosystem, anchored by the world’s most liquid Asian FX futures exchange together with cutting-edge FX technology and workflow solutions from BidFX servicing the buyside and MaxxTrader focusing on the sell-side,” Lee said.

“Furthermore, with SGX CurrencyNode, an FX electronic communication network that connects global participants anonymously to unique and deep OTC FX liquidity pools, this brings everything regarding FX under one umbrella, which is very compelling. We provide the end-to-end digitalisation, the venue and seamless access to futures and OTC markets.”

The combined businesses in June hit a milestone of more than $100 billion notional traded a day on average in the month, a testament to SGX’s efforts to encourage adoption across the different platforms, Lee says.

“We have been successful in gaining immense support from prime brokers, buyside and sellside regional clients to connect those markets,” he added. “The assumption was that all of those players would come together to create more liquid matching and price discovery.

“It’s been great to see that support emerge from a diverse group of market participants and to develop a true all-to-all market. In June 2023, the combined average daily volume of SGX FX futures and OTC FX contracts from BidFX, MaxxTrader and SGX CurrencyNode rose above $100 billion for the first time, an important milestone for us.”

The vision for the exchange, in common with other major players targeting the region, is to create a truly connected platform that allows traders to seamlessly pick and choose their execution style. The challenge is to have that ecosystem in place early to support the FX market’s expected growth, and that is where SGX feels it has an advantage.

“The holy grail to all this is that you have a settlement process-agnostic infrastructure in which there is a single technology for price discovery whether it is through over-the-counter (OTC) or futures,” Lee said. “To the extent that OTC and futures are the most efficient way of settlement, you then want to segregate that process so that you have the benefit of best execution and liquidity. At the same time, as a function of capital balance sheet settlement considerations you want to have an infrastructure that is flexible enough for you to be able to send trades through both central clearing and bilateral markets.

“If you look at the different ways to settle foreign exchange and non-deliverable forwards (NDFs), exchange-listed futures have to be the most efficient from a balance sheet risk/capital perspective. Once major liquidity providers are comfortable with that risk management and infrastructure change, the next step is to think about how they want to offer futures services to their clients.”

Beyond the FX markets, SGX is also watching the rates market for tailored regional product development after a shift in central bank policy in the last two years.

“Now the interest rate cycle is normalising, the demand for active risk management in the front end becomes real,” Lam said. “I would say that a large part of the work that every exchange is doing is to meet that new hedging demand. For us, that means actively looking at opportunities from a market perspective.

“The nuance around that in Asia Pacific (APAC) is that the predominance of proxy dollar markets means that there is already an active rates market out there, so it has to be specially tailored to specific use cases. International access to the regional markets is growing, so it is natural that the demand for rates specific solutions will emerge.”

SGX earlier this year unveiled a partnership with Singapore sovereign wealth fund Temasek to develop MarketNode – a blockchain enabled digital asset trading platform - and enhanced the MaxxTrader offering with the rollout of MaxxAI, an augmented execution offering.

“We think that the combination of digitalisation – together with cloud computing, big data and Artificial Intelligence/Machine learning – will set off the flywheel of the adoption of digitalisation and more end-to-end automation, driving the efficiency of entire financial service sector,” Lee said.

“That will cut across office productivity, financial services, and sales/trader investment decision execution. We have taken a step towards that with the recent launch of MaxxAI, and that is really about facilitating client understanding of the quality of client and trading partners interaction. That will be the first phase of a process that ultimately leads to more demand for digitalisation.”