Singapore banks' FX volumes surge on strong Asian growth

Singapore

SINGAPORE banks' foreign exchange (FX) volumes are gaining at a blistering pace as global flows pour into the region, attracted by its strong economic fundamentals.

The city's major banks report strong double-digit increases in their FX volumes, especially emerging market currencies, as Singapore, the world's third largest FX hub after London and New York, continues to facilitate global flows. In the October 2018 FX survey the average daily volume for London, New York and Singapore was US$2.6 trillion, US$995 billion and US$508 billion, respectively.

So amid a global slowdown in trading of G10 currencies due to low volatility, banks and other FX players continue to set up or expand their Asian FX operations in Singapore. G10 currencies refer to the most heavily traded currencies in the world and consist of USD, euro, sterling, yen, Australian dollar, Kiwi, Canadian dollar, Swiss franc, Norwegian krone and Swedish krona.

HSBC's US strategists have told clients they have no trade ideas because the G10 currency markets are so sleepy, said a Bloomberg report last week.

According to Jose Luis Yepez, Citi head of FX and local markets, Asia-Pacific, Singapore will continue to flourish and grow as a FX hub, not only in Asia but also globally.

"FX trading activities and volumes in Singapore have increased over the past few years due to several reasons including the strong economic growth of Asia and larger share of global investment flows into the region," said Mr Yepez.

Other reasons Mr Yepez cited include increased volatility in China and India markets, which resulted in higher FX activity, and more hedge funds and institutional investors have started or intensified their trading in Asia.

Also there is significant growth in the wealth management industry in the region.

In addition, eNDF (electronic non-deliverable forwards) offerings, which are currently small by volume but well-received by market participants, have started to make an impact, he said. NDF refers to currencies which face some form of capital controls.

"All these have enabled the city-state to gain market share, even at times when global volumes have declined or stagnated," he said.

Singapore's rising importance as a global trading centre is seen by its consistently strong performance, which is partly contributed by its efficiency in executing FX transactions, he said.

This has positioned the country to become an integral part of the global FX liquidity pools along with the two other major FX centres, London and New York, he said.

"More importantly, the local regulator is committed to ensuring a level playing field and has introduced favourable policies towards FX trading, all of which have further supported the development of Singapore as the key global FX trading hub," said Mr Yepez.

"Singapore benefits from all the above-mentioned, be it directly or indirectly, and also the fact that many banks have set up their FX hubs in the country," he said.

Citi recently said it is setting up an electronic FX pricing and trading engine in Singapore.

DBS Bank, South-east Asia's largest bank, is enjoying strong growth in the FX spot space.

The bank's total FX spot volumes for 2016, 2017 and 2018 have grown year-on-year by 20 per cent, 28 per cent and 45 per cent, respectively, said Lim Wee Kian, DBS managing director, head of FX.

"Digitisation of DBS' FX transactions was a key driver of the strong growth in FX volumes, which started from a lower base, coupled with the strong traction from all remittance corridors of our consumer banking group and wealth management business," said Mr Lim.

"Singapore is fast evolving into a natural hub for FX in Asia with the many initiatives to promote FX trading in the region, coupled with regulatory support to encourage key market participants to set up their pricing and matching engines in Singapore, " said Mr Lim.

In 2017 the government said in its industry transformation map for financial services that one aim is to develop Singapore as the global FX price discovery and liquidity centre in the region through encouraging market participants to set up their matching and pricing engines here.

FastMatch, Euronext's platform for spot foreign exchange trading, last month said it is expanding in Asia with the launch of the first electronic communication network in Singapore. FastMarch expects its matching engine to be operational later this year which will improve connectivity and trading for Asia-Pacific clients.

Last year, Switzerland's largest bank UBS also announced that it would set up an e-FX trading and pricing engine in Singapore.

Geoff Kot, Standard Chartered Bank's global head of FX cash, said globally the bank continues to see steady FX volumes in emerging markets (EM).

"Even though volatility is low, the global bond rally has supported inflows back into EM in Q1 2019, and this has lent support to overall FX activities in the Asean region. This stands in contrast to FX activities in developed markets, where globally-synchronised monetary policy has resulted in low realised volatility and lower turnover so far in 2019," said Mr Kot.

"Looking at Singapore specifically, in 2018, Standard Chartered delivered a year-on-year double-digit overall growth in FX volumes led by EM. As at Q1 2019, the bank has seen a modest quarter-on-quarter pick-up in volumes," he said. "Last year we saw EM currencies like RMB, IDR and INR gaining traction among our clients."

IDR and INR are the Indonesian rupiah and Indian rupee, respectively.

Even the fact that London - the world's largest FX centre - has a higher volume of offshore renminbi transactions is unlikely to topple Singapore's status as Asia's FX hub.

In February, the Financial Times reported that in December London accounted for 36 per cent of RMB transactions, ahead of Singapore and France which have about 6 per cent each, citing Swift, the payments company.

Bankers say London is awake for trading when Asia goes to sleep.

Claire Chin, OCBC Bank senior vice-president, global treasury, said London does have several advantages as a FX clearing centre.

"Major financial institutions are located there, in addition to its business day overlapping with those of global financial markets such as New York, Hong Kong and Singapore," said Ms Chin.

"Among our corporate customers, FX transactions continue to gain momentum, increasing 25 per cent year-on-year in 2018. This was driven partly by a 270 per cent year-on-year increase in offshore renminbi volumes. As long as Singapore maintains its status as a hub for corporates expanding into the region and vice versa, Singapore should continue to play a meaningful role in facilitating global FX flows," said Ms Chin.

The RMB market in the Asian time zone is shared by Singapore, Hong Kong and China, said DBS' Mr Lim.

Greater China is naturally seen as the centre of excellence for the RMB business, with London taking over the flows after Asian trading hours, he said.

"Despite this, we see the demand for RMB still growing at a rapid pace for Singapore. DBS Singapore's total USDCNH FX spot volumes grew 50 per cent from 2017 to 2018," he said.