The TRADE predictions series 2024: Foreign exchange, the regulatory impact

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Martin Hendry, deputy head of trading, Liontrust Asset Management 

As we peer into the crystal ball for 2024 trading, a notable shift is anticipated with the adoption of T+1 settlement for US equity transactions. This transition is poised to reshape the pace and efficiency of equity trading, promoting quicker settlement cycles. It’s fully expected that the spotlight will turn towards the foreign exchange element, often deemed the least loved asset class. 

Asset managers and traders are expected to re-evaluate FX markets, seeking evolution from the industry to source liquidity later in the trading day around the US close. Concurrently, the need for market participants to embrace technology becomes increasingly apparent. Automation, artificial intelligence, and data analytics are anticipated to play pivotal roles in refining trading strategies and navigating the complexities of across asset classes in this tech-driven financial landscape of 2024.

Daniel Chambers, head of data and analytics, BidFX (an SGX company)

This year has seen investors hanging on every word uttered by central banks around interest rates. Changes in interest rates inevitably drive FX markets. Depending on how markets react to monetary policy next year, and whether volatility returns to FX, there will be an even greater need to actively assess liquidity in a much more granular way. That said, even if FX markets are more benign in the New Year, this will not put a stop to the general trend of hedge funds and asset managers seeking more precise insights from their liquidity providers. 2024 will see investment managers ask why their FX flow has been directed to certain counterparties, rather than passively accepting the liquidity provider’s perspective.

Rather than simply looking at FX flow distribution, investment managers will be demanding insight into the exact rationale behind a certain bid/offer price being offered up at 11:55am just prior to the Bank of England’s rate decision. They will also want to know who is providing the tightest spreads at that exact time, in addition to identifying those at the top of the order book and those displaying a price skew.

Basu Choudhury, head of partnerships and strategic initiatives, OSTTRA

One of the big challenges for 2024, assuming the successful operational migration over to T+1 for US securities in May, is how will the FX markets (execution venues, makers and takers, intermediaries) react to the compression of execution times in the context of constrained settlement relationships? What will this imply for post-trade processing (matching and settlement) and provisioning of credit, the life blood in FX markets? The shortening of the settlement cycle for US equities and bonds brings settlement risk into sharp focus for FX participants. What challenges will Asian and European asset managers face with their FX overlay process? It is likely that currency risks and costs will increase for the end customer.

When buying US stocks, from an FX perspective, in order to fund the purchase of the stocks, the investment manager will need to convert their Singapore dollars into US dollars within a compressed timeframe. Therefore, to mitigate the risk of failing to settle due to not having enough dollars to pay for the stocks, some key questions will need to be addressed. For instance, at the time they need to execute FX transactions which liquidity pool and how many counterparties can they execute with in order to acquire the USD in time for DvP settlement?

Vikas Srivastava, chief revenue officer, Integral

The introduction of T+1 in North America in May 2024 understandably occupies the thinking of technology officers and heads of desks for their FX trading activities. The challenge primarily sits with those asset managers in Europe and APAC trading in US markets who will have a matter of hours to match and settle both the equities and FX leg of the trade in order to settle T+1.

The only real solution to this issue is automation of trading workflows. Banks should see this as an opportunity to better serve their clients in their hour of need by directly embedding their services into their buy-side clients’ workflows. Banks should be looking to partner with technology firms that enable them to embed their FX services via API in their clients’ processes.

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