Eric Huttman, chief executive, MillTechFX
Despite the relative calming of FX volatility compared to 2022, the management of currency risk was still a top priority for fund managers throughout 2023. Our own research found that 82% of North American and 77% of UK fund managers were affected by USD and GBP volatility respectively, clearly highlighting that fund managers aren’t out of the woods yet when it comes to the threat of currency movements. While there will always be some that don’t hedge at all, many are deciding to hedge a higher amount of exposure to protect their returns. Likewise, rather than using long-dated FX forwards of up to a year or two, many fund managers chose to lock in rates of up to six months or less to add an extra layer of flexibility and nimbleness should the market move against them.
Despite the renewed focus on FX risk management, many fund managers still rely on manual legacy systems which can be cumbersome and inefficient. As a result, we can expect more firms to begin embracing new technology to automate their FX operations, helping them save much-needed time and resources and manage FX risk more effectively. Whether volatility will significantly increase again in 2024 is somewhat beside the point. The more important factor at play is underlying desire that funds have to keep the impact that FX has on their P&L to a minimum in the context of ongoing macro uncertainty. This uncertain climate, combined with the opaque nature of the FX market, means that we would expect firms to continue focusing on FX risk management.
Paul Houston, global head of FX products, CME Group
Given all the uncertainty in the world and in business, risk is likely to remain a dominant theme in 2024. That goes for all markets, including FX swaps where it will be more important to manage short term interest rate risk. The evolution of the FX swaps market is at an important turning point, with many participants looking to electronify and optimise what has traditionally been traded on an RFQ or RFS basis, as well as demanding much greater price transparency. As the landscape continues to evolve, we expect greater client interest in hedging FX swap risk, both spot-starting and forward starting, via FX futures in 2024.
Stephan von Massenbach, chief revenue officer, DIGITEC
The FX swaps market is evolving quickly and we expect the pace of change to continue through 2024. As clients look to FX swaps as a source of global funding, there is demand for relationship banks to provide liquidity across multiple currencies and tenors. With this demand, banks will only be able to service clients efficiently by implementing scalable technology solutions, where trading workflows are completely automated – in data, pricing, distribution, and settlement.
In 2024, interdealer trading of FX swaps, which has traditionally been dominated by the broker market, will start to migrate to electronic venues. 360T and LSEG offer electronic interdealer FX swaps trading venues, and many other marketplaces are looking into establishing new and additional venues. As the FX swaps market grows, we expect to see regional banks trade more FX swaps. In the past they could not justify the investment in on-premise applications, but with SaaS apps deployed in the cloud, they are increasingly adopting FX swaps pricing technology to service their clients.