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UAE FX 2021: Exploring the digital road ahead

The start of 2021 is greeting currency professionals with new and ever more complex geopolitical, regulatory and compliance challenges, but those who have harnessed technology to their advantage will survive, even thrive.
The United Arab Emirates (UAE) leads the Middle East in the pace of adoption of digital technology. In fact, it is ranked first in […]

Benjamin Grolimund, Middle East and Africa Regional Manager, Financial Products – Bloomberg LP.
Benjamin Grolimund, Middle East and Africa Regional Manager, Financial Products – Bloomberg LP.

The start of 2021 is greeting currency professionals with new and ever more complex geopolitical, regulatory and compliance challenges, but those who have harnessed technology to their advantage will survive, even thrive.

The United Arab Emirates (UAE) leads the Middle East in the pace of adoption of digital technology. In fact, it is ranked first in the Arab world and 31st globally for remote working, according to a report by Circle Loop. Against this backdrop, and increased investor appetite from the Middle East, the pace of FX trading in the region is picking up.

However, for the industry to grow in the UAE and wider Middle East, it needs to be mindful of the following trends.

Geopolitics & regulation

As Brexit unfolds with Britain withdrawing from the European Union, currency traders around the world are looking at the best ways to adapt to this new marketplace.

The transition away from the traditional bank interest rate benchmark, the London Interbank Offered Rate (LIBOR), is also moving ahead, although the target dates for details may not be clear until after the end of 2021.

In the U.S., FX swap trades have to adhere to Dodd Frank laws and execute on a swap execution facility (SEF).  Some worry that regulations may expand further under U.S. President-elect Joseph Biden’s administration, but it is too early to predict that.

Meeting all the new regulations, we expect, will significantly increase the number of compliance, legal and regulatory personnel needed. Some firms are considering incorporating due diligence checks into their electronic trading workflows, so they can meet these ever-changing demands.

Automation is no longer a luxury

FX professionals can no longer ignore automation. Without a clear digital pathway, a company’s financial activities pose unnecessary and costly logjams in its day-to-day operations.

Financial firms such as asset managers, pension funds and hedge funds need to continually upgrade their technology. While this can require investment, the benefits can far outweigh the cost. An upgrade in trading tools is essential to meet global regulations, but it also allows them to do in seconds what used to take hours. In addition, it enables financial firms to remain competitive and grow their business within their country, throughout the region and within world markets. Having newer technology gives companies a distinct advantage over their competitors.

Electronic trading platforms can compress the process into a consistent, reliable workflow that draws on sophisticated execution, accounting and reporting tools. Particularly important is e-trading’s ability to produce prices from multiple liquidity providers simultaneously to help instantly identify a counterparty that suits the trading strategy.

At today’s fast pace there is little time to call or chat with liquidity providers for smaller deals. Traders do not want to waste time finding the best price for each trade and risk losing any market advantage they may have had when they began assessment, or potentially tip their hand. A digital route creates a quick solution and allows FX teams to spend time on large trades or more profitable tasks.

For more complex structures, where chats and telephone conversations can be a valuable part of the negotiation process, manually booking trade details can be time consuming and error prone. This process, too, can be enriched by scraping actionable trade data from chats or quickly capturing data from voice trades for digital affirmations.  By automating the process and integrating it into the wider trading system, FX pros can better monitor their markets and reduce the risk of human error when processing orders.

The high cost of inaction

Many trading desks require sophisticated solutions that include smart order routing, algorithmic trading and transaction cost analysis. Middle office, back office, and compliance teams need tools to increase efficiency while reducing operational risk, from trade capture through confirmation, matching and settlement.

All of those needs can be addressed via electronic trading. Today, nearly 75% of all FX trading globally is done electronically, which will continue to increase as new technologies reduce risks and costs and increase efficiency and performance.

Trading electronically is no longer a luxury, but a necessity to ensure efficient liquidity distribution, price transparency and best practices. The regulatory environment is ever-changing and penalties for non-compliance are rising. Requirements for best execution no longer simply mean getting the “best price” and firms need to comply with all regulatory and internal policies, all while facing pressure to reduce transaction costs.

Today, more than ever, it is vital that asset managers transform their systems into digital ones. Efficiency is particularly important, as FX professionals in the UAE, regionally and globally are being asked to do more with less. While they may fear the technological leap necessary to make the transition, the cost of inaction can be quantified not only in lost efficiencies, but in the dollars and cents of missed opportunities.

Benjamin Grolimund, Middle East and Africa Regional Manager, Financial Products – Bloomberg LP.

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