KBANK, UOB, Krungsri, and OCBC reveal top threats in the forex sector

Decreasing liquidity, Asian integration and regulation are just some of them.

Asian banks have to brace themselves for a slew of challenges in the forex sector. Navigating the regulatory barriers is one major concern, not to mention the high levels of volatility in the market.

We spoke to a couple of bankers to know what they think are the biggest challenges for banks today:

ABF: What do you think are the biggest challenges Asian banks currently face in the forex markets?

Thiti Tantikulanan, Capital Markets Business Division Head, KASIKORNBANK
Decreasing market liquidity: Due to impact of Basel III on capital requirement and EMIR/DF on stricter internal trading policy, number of market players are decreasing, resulting in lower liquidity in the market.

With regulators in Europe and the US accelerating the implementation of Basel III and EMIR/DF regulations, banks began adjusting their operation.

We see less and less proprietary trading activities and higher credit charge in derivatives transactions. This has been hindering liquidity providing in interbank market, both in forex and derivatives, making it quite a challenge to serve customers whose flows are growing.

Asian integration: More and more demand for intra-regional cross-border transactions, especially among ASEAN and China, while there still are regulatory barriers.

FX hedging instruments in such developing market are always in need but given FX and capital control in most countries, it is still difficult to find solutions under the scope of regional currencies as customers require.

Most of the time a way out need to fall back to usage of non-regional currencies, which usually incur additional cost for the parties in such transactions.

Ng Kwee Ming, Executive Director, Corporate Treasury and Advisory, United Overseas Bank
With increasing cross-border business and rising intra-regional trade, businesses will have increasing demand for FX solutions for their trading, investment, hedging, clearing and settlement needs.

At the same time, most Asian currencies are now being guided within a managed float by their respective central banks in the FX markets. This is in contrast to the pre-1998 days where most Asian currencies were pegged to another foreign currency, such as the US dollar.

Without being pegged to another currency, Asian currencies may display a larger volatility and this in turn becomes a concern for businesses as they may have dealings and receipts in different currencies. FX solutions are therefore important for businesses to address their needs in managing currency volatility and fluctuations.

However, businesses may find FX trading a challenge as regulations across different countries and markets may vary greatly. Regulations for the FX and capital markets are becoming more stringent these days, with capital controls for both inflows and outflows becoming increasingly common in Asian markets.

This is because regulators also see these regulations as important tools to manage liquidity, ensure stability and reduce speculations in the markets.

What this means for customers is that they may not be able to easily move their capital around through the FX market, especially when do not have access to the local currency markets that they wish to deal in. Many regulators also do not allow financial institutions without a local presence to freely trade or settle a local currency.

Masashi Nimura, Deputy Head of Global Markets Group, Krungsri (Bank of Ayudhya PCL)
We think we have to be watchful not only about potential counterparty risks but also the abnormally high level of volatility in forex trading. Financial markets across asset classes; commodities, FX, bonds, stocks, have become ever more inter-connected through rapid shift in asset allocation strategies of fund managers, making markets more unpredictable. 

Our customers, especially the corporate sector, therefore, needs to hedge against their exposures. While this provides opportunities for the bank’s markets business, it also highlights the need for competent risk management.

Our thoughts are that the global economy has entered the phase of “re-balancing” in which the developed market such as the U.S. is doing better than emerging ones including China and Thailand, following a period of the so-called "global imbalance" over recent years. During this phase, we will get a lot of price fluctuations, negative news, and rumors, as well as lowered risk tolerance of market players.

In addition to that, tighter regulations and supervision, Dodd-Frank, EMIR, Volcker Rule, FATCA, would be impact on FX market, namely actions from both the FEDS and the PBoC are the more influence of the FX market.

Johannes Husin, Treasury Director, OCBC NISP
The function of the FX liquidity in the market has become lesser which increase the for all the players and the change of the regulation/compliance role in the FX market