A market guide published earlier this year by First Abu Dhabi Bank highlighted the disparate nature of the SSA FX market, which should come as no surprise given the economic differences between the more than 50 countries that make up the region.
So while the Kenyan shilling, the Zambian kwacha and the Ugandan shilling are all free-float currencies, the Zambian and Ugandan central banks are prone to market intervention, and the Ghanaian cedi is actively managed by the country’s central bank.
Both the Mauritian rupee and the Nigerian naira are managed float currencies, but the former has a number of separate exchange-rate windows.
One observation that can be confidently applied across the region is that there has been a shift away from voice channels to a more click-and-deal model for FX trading, prompted by larger African banks using electronic solutions from their offshore liquidity providers in major currencies.
This is the view of Tim Hutchinson, head of global markets digital and ecommerce at Standard Bank, who refers to a number of banks offering some form of electronic execution capability – predominantly through a single-dealer platform – during the past three years.
“This has prompted technology vendors to enter the market and make it possible for more banks to execute electronically,” he says.
International corporates and buy-side clients, as well as larger local clients, are moving to electronic FX execution, adds Thomson Reuters’ Africa solutions sales specialist Loren Taylor.
In South Africa, most banks offer this either via their own single-dealer platforms or one of the multi-bank vendor platforms, she adds.
“Across the rest of the region, electronic FX execution is typically led by the international banks and larger South Africa banks providing liquidity in G10 currencies to local, onshore counterparts,” says Taylor.
She refers to larger institutional and emerging market (EM) players seeking to grow their coverage and ongoing engagement between clients, banks, regulators and technology vendors to address aggregation in illiquid or restricted markets.
“All the major platforms are available,” she says. “Our experience has been that large buy-side and global corporate clients with centralized treasuries prefer electronic FX execution via multi-bank vendor platforms.”
Standard Bank’s Hutchinson acknowledges that the market is sharply divided between South Africa and the rest of the continent: more than 70% of Standard Bank’s trades in South Africa are done electronically, compared with around 25% in East Africa – notably Kenya and Uganda – and less than 10% in West Africa.
These figures are in line with the results of a Bloomberg survey of Kenyan FX professionals undertaken in March.
|Tod Van Name,|
Tod Van Name, global head of FX electronic trading at Bloomberg, observes that around one-in-four respondents said all of their trades were carried out electronically.
In addition, some clients remain reluctant to transact large trades electronically, with 55% of US dollar volume in South Africa still traded through voice channels.
The main stumbling block to growth in electronic execution is liquidity, particularly since the majority of the market is for local currencies that are not only illiquid but are also often under some form of capital control.
And the absence of primary markets outside South Africa creates a further drag on liquidity. In the South African market, most offshore banks have revived their EM market-making desks and there has been notable interest in rand market-making, due to it being a proxy for EM risk.
However, this trend has created issues around liquidity quality, adds Hutchinson.
“Given that many of the offshore banks closed their emerging-market desks in the early part of the decade and trades are being fulfilled by electronic market-making desks with much less appetite for risk, the moment there is volatility in the market most liquidity dries up.”
According to Paul Fenwick, head of ecommerce global markets at Absa Capital, access to liquidity is a challenge when it comes to offering prices in a number of SSA markets. Even during local business hours when liquidity is at its greatest, pricing and managing a large FX trade can significantly move the market and make it difficult to price accurately.
“After local hours, trading is non-existent and if you want to offer liquidity during these times the market makers have to run with a position till the market opens the following business day,” he says.
“Offering products in FX outside of same-day value trading adds even more complexity to the process as the number of participants willing to offer and trade in forwards and options, for example, in these local currencies decreases significantly.”
Mpumi Makhubu, eFX liquidity and product manager at Standard Bank, observes that non-market makers have been active in the South African rand market.
“The wide spreads and latency gaps synonymous with SSA markets have looked quite attractive to non-bank participants, but remaining competitive has become difficult due to the hold times and internalization ratios required in these markets,” she says.
“The strict regulatory controls imposed by some countries have also worked against non-bank market makers.”
This point is taken up by Absa’s Fenwick, who describes keeping up with currency control regulations as a large component of dealing and offering electronic trading in SSA markets. As recent as January, Angola’s central bank announced plans to ease currency controls.
“Non-bank market makers have gained significant flow from big corporates and global development organizations trading out of the US or Europe into sub-Saharan markets,” he concludes.
“Within local markets, their share is growing significantly in the retail segment, but local corporate business is still predominately facilitated through financial institutions.”