According to the triennial BIS survey, in April 2004 an average of $1.9 trillion was traded every day in the global FX market. This was an increase of 36% since the last survey in 2001. The FX market is in rude health at the moment due to a number of key changes that have spurred its growth.
Perhaps the biggest change has been the development of the CLS system, which for the last two years has effectively taken settlement risk out of the picture for those banks and counterparties that use it. According to Rob Close, deputy CEO of CLS, nearly half the world's daily spot trading now goes through CLS. With 15 currencies on board by the end of the year and 59 settlement members, the system is a huge contributor to the growth in the global FX market. "Settlement risk has been eliminated and CLS has been a huge contributor to the growth of the market," says Close.
Delegates to Sibos heard an example of how CLS is transforming the settlement of FX in Asia. In 2003 the Clearing Corporation of India (CCIL), decided that it wanted to roll out CLS for all its members for dollar/rupee and cross currency trading in the $4 billion a day Indian FX market. CCIL wanted to ensure guaranteed settlement for FX in the same way it had done for government securities trades. This innovative scheme is being implemented with the help of ABN AMRO and should be live by the end of 2004. "We wanted to get third party aggregation and connect the whole Indian banking industry to CLS," says Indirani Rao, from CCIL. "We can get better prices, better liquidity management and lower settlement risk." The move is aimed at allowing Indian banks that might be too small to get better credit limits and better access in the global FX settlement system than they could do on their own. "This will allow smaller banks to enjoy the benefits of CLS," says Rao.
But it is not just the global settlement of FX that has become easier. With the rise of electronic trading, ease of access has increased and the cost of trading has decreased, opening the market up to new customers. "E volume is the growth market for foreign exchange," says Seth Cohen, global head of FX bank marketing at UBS. "The marginal cost reduction is the primary cause of this. We can do tickets today that just were not commercially viable a few years ago." Cohen points to two areas of growth today that were not there three years ago. Firstly retail aggregators such as Saxo Bank can now agglomerate retail trades. Secondly retail structured products that banks like UBS sell through portals to private bank clients, have also proved hugely popular. Cohen says that neither of these two market segments could have been served commercially two years ago.
"The marginal cost of doing a trade has gone down," agrees Drew Gross, MD at BNP Paribas. "With the cost down, the volume can increase; supply at a good price does create its own demand."
All these structural changes in the market have gone hand in hand with a sharp growth in the participation of Asia in the global FX market. According to Wah Seng Lee at CSFB, there has been a sharp increase in volumes of Asian FX business since the crisis. Japan and Singapore are respectively the number three and four FX markets in the world.
Also non convertible and managed currencies such as the Renmimbi, Won and NT dollar are still prevalent in Asia. A change in status to full convertibility could see a dramatic increase in FX volume trades in Asia. "Asia as a region is out of the downturn and has seen big growth over the last three years," says Lee. "Asia will be a key focus for the FX market in coming years."
Asia, like the rest of the world, has also seen a huge growth in the number and activities of hedge funds trading in the market. There has also been a general acceptance of FX as an asset class in its own right by the general investment management community. These two factors have further contributed to the growth in the FX market. "Asian investors are more prepared to invest in FX as an asset class in its own right," says Lee.
As more Asian banks connect to the CLS system through innovative schemes such as CCIL has implemented so Asia will form a bigger part of the global FX market. More Asian currencies coming into the CLS system will further push the market as will the adoption of more electronic trading systems by Asian banks. With the growth in FX as an asset class of its own and more institutions in the market, the future of FX looks fixed.
