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Trading Dynamics of Emerging FX Markets

by James Watson, Head of EMEA FXAll New business, Thomson Reuters

This article explores the foreign exchange trading dynamics of emerging foreign exchange markets from the perspective of FXall, the leading multi-bank foreign exchange trading platform serving over 1,300 institutional clients across the foreign exchange markets.

Multinational companies are increasingly looking to developing markets as a source of growth and, at the same time, many local corporates regularly look outside their domestic markets to compete internationally. Currency fluctuation coupled with regulatory complexities have driven corporate treasurers to focus on their FX execution frameworks, including risk management, as one way to help protect their companies’ bottom lines.

Certain trends, such as the continued growth of electronic trading and increasing regulation of derivatives trading products, are impacting corporate treasury approaches to FX execution and provide insight into the future direction of the market. Here, I explore some of the drivers of this change.

Subsidiary automation facilitates centralised treasury functions

In order to manage FX risk, it is essential that corporate treasurers thoroughly map out the dynamics of their businesses, identify and quantify their FX exposures, and then implement the relevant remedial measures – such as centralising their treasury function. FX risk management is a time sensitive activity and it is increasingly important that treasurers have the ability to view and measure their risk exposure in real time. The drive towards better risk management in the global financial markets has resulted in a need for corporates to implement more sophisticated systems in the form of subsidiary automation, whereby their treasury systems and trade execution functions are centralised. Traditionally, companies operating across developing markets, and globally, have operated in a silo fashion and therefore were not benefitting from the efficiencies that can be gained through netting their transactions. This decentralised approach to the treasury function involves the management of multiple banking relationships in multiple locations, which can often prove extremely inefficient and costly.