Structural Change of the Currency Market in 2014 - how MOEX became technology-focused exchange
Published: 2022-06-15 12:20:07


Recent reviews of the Bank for International Settlements (BIS) and the Monetary Committees of the UK, the US and Japan identify the following trends in the global foreign exchange market: first, the growing role of non-bank financial institutions (small banks, institutional investors and hedge funds), second, increased internalization of currency trading and its increasing concentration in the financial centers, and the third – the structure of the market meets the growing needs of the participants, evolving through a variety of technological innovation.

In recent years, the global foreign exchange market is subject to significant regulatory and technological changes, which in turn affects the composition of the participants and market structure. One of the main trends is the decline in the share of traditional inter-dealer (interbank) trade, while transactions between banks and other financial institutions are growing at faster pace: asset managers, hedge funds, institutional and private investors. The share of transactions between banks-respondents and other financial institutions has increased from 28 to 53%.

Modern information technologies have expanded access to the market for private investors. Internet access lets individual investors pour into the FX markets. Retail currency trading is gaining steam worldwide. It received an additional boost when followed by institutional investors, private individuals and corporate customers also began using high-speed automated trading (HFT). 

The Russian foreign exchange market has not remained aloof from global trends. According to the Bank of Russia, in 2014 the share of corporate customers (non-banks) in the total volume of foreign exchange operations of Russian banks rose from 14% in I quarter to 20% in the IV.

The resumption of the “dollarization” of the economy, forecasts a further drop in the ruble exchange rate and inflation expectations contributed to the excessive demand of the population and enterprises for foreign currency and the conversion of ruble deposits in foreign currency. In the FX market, Moscow Exchange (MOEX FX) experienced a sharp increase in client activity.

This became possible after Moscow Exchange, considering the needs of the participants, followed through on a number of projects for the development of the Client Access, which – in turn – made a significant contribution to the growth of market liquidity this year. Starting from 2012, direct access to trading (Direct Market Access, or DMA) in the foreign exchange market took on various categories of participants. Interested physical persons and organizations may become a customer of one of the 70 banks or brokers providing such services, to establish the necessary technical equipment and to participate directly in the auction.

Client access to the currency market of Moscow Exchange will significantly enhance the activity of the participants and expand the customer base through new categories: non-residents of the Russian and foreign brokers and sub-brokers, Russian companies, individuals. During 2014 the number of registered customers increased 4.5 times from 46 thousand to 212. Turnover on client operations in 2014 increased by 2 times to 60 Trln. rubles, while the share of customers in the turnover of spot transactions in January 2015 exceeded 43%. At the same time turnover of individuals in December 2014 increased six-fold compared to December 2013 to 1.2 Trln. rubles.

As a result of the liberalization of currency legislation in Russia not only banks gained the opportunity to enter the FX market. Admission to trading on MOEX FX of non-credit organizations, i.e. professional participants of the securities market, has become the most important innovation to the expansion of the customer base and a strong incentive for the development of the Russian foreign exchange market. In accordance with the new edition of the Rules of admission, which came into force in December 2012, which granted the admission to trading on MOEX FX for non-credit institutions, licensed professional participants of the securities market with the amount of not less than 180 Mln. rubles. On January 1, 2015 there were 40 non-credit institutions. Their share in the total turnover of MOEX FX in December 2014 reached 7.5% compared to 2.4% in December 2013.

The main directions of changes in the structure of the Russian foreign exchange market are in line with global trends. Currency proportion increasingly determined not only by flows of export revenue, but also the movement of international capital, the liquidity of the financial system, the development of the Russian legislation. Russia has a rather liberal foreign exchange regulation, which does not contain restrictions on the movement of capital, the purchase and sale of foreign currency for investment purposes. In addition to the exchange trading foreign exchange transactions are carried out on the OTC market (operations of banks with each other and with their customers, conducted without the participation of the Exchange). On the OTC market, Russian banks may enter into transactions with non-resident banks. According to the Bank of Russia in 2014, 57% of the total volume of the off-exchange FX transactions are made with non-resident banks. In the absence of restrictions on the movement of capital there was clear movement of some of these transactions abroad. In October 2014 the UK market average daily dollar-ruble turnover of spot and swap has reached $ 27 Bln., a 19% increase from October 2013, although within the last six months the volumes decreased slightly (4%) . In general, over the past 7 years, the share of London participants in the total volume of operations with the ruble has grown from 9 to 35%.

The liberalization of currency regulation and globalization of the world economy contributed to increased competition between Russian organized market and the global trading systems. The Russian market is at a disadvantage, since, according to Russian legislation, non-residents cannot be direct participants in the auction, until recently, these functions were performed for the subsidiary banks with 100% foreign capital. Access of non-residents on the stock market has become possible with the development of the Direct Market Access (DMA). As a result, at the end of 2014 there are more than 4 million customers on Moscow Exchange, non-residents from 65 countries. Over the year, their share increased from 8% (in December 2013) to 15% (in December 2014).

The entrance of brokers onto the market, the expansion of the customer base through the development of DMA also contributed to the progressive growth of the turnover of the market – in October 2014 the trading volume on Moscow Exchange rose by 20% compared to October 2013. As a result, the share of the foreign exchange market of MOEX in the total volume of ruble conversion transactions for the Russian and the foreign banks (including the operations of non-residents in London) in October 2014 reached 36%.

A more detailed comparison of the Russian and British statistics allows the expert to estimate the distribution of USD / RUB volumes into four groups: 1) the exchange-regulated market (Moscow Exchange) 2) OTC transactions concluded between the Russian banks – the internal market (OTC-local) 3) operations where one side is a non-resident – cross-border transactions (OTC cross-border) 4) the volume of operations with the ruble, which conduct non-residents in London without the direct mediation of Russian banks – transactions resident / non-resident (OTC offshore). Offshore operations with the ruble became statistically significant since 2011, for three years, they have increased almost five-fold to $ 9 Bln. per day, reaching 21% of all USD / RUB transactions in Russia and London.

In recent years, Moscow Exchange managed to improve its competitive position in operations with ruble. Notably, up until 2014 in connection with the structural liquidity deficit in the banking system, this was mainly due to growth in swap transactions as short-term refinancing operations were carried out mainly in Russia (including the participation of the Central Bank), now the exchange spot market was supported by the client access projects, increased volatility and excessive demand for currency on the part of enterprises and the population.

The largest overseas platforms for ruble conversion operations are the multi-dealer platform EBS ICAP and Thomson Reuters (which bought the electronic system FXall and in 2013 began to publish a joint FX spot volumes). Unfortunately, ICAP and Reuters did not disclose information on the volume of trade in certain currencies by publishing a monthly data total FX turnover. In the IV quarter of 2014 the average daily trading volume on the EBS Electronic FX totaled $ 119.2 Bln., and the turnover of all major trading systems FX Spot Thomson Reuters (including spot FXall) – $ 120.4 Bln. Despite a slight slowdown in the volume of exchange market in the IV quarter, in general, the year 2014 saw an increase in the share of the foreign exchange market of Moscow Exchange with respect to those of ICAP and Reuters:
• compared with ICAP to 18.4% in 2013 to 25.7% in 2014;
• compared with Reuters from 15.2% in 2013 to 19.9% in 2014.

Moscow Exchange in recent years focused on the development of services at international standards and projects, empowering non-residents on the stock market. For example, last year the project was implemented by the division of trading and clearing participants’ status. On December 1, 2014 Moscow Exchange has granted the foreign exchange market participants the opportunity to get a new status – “general clearing member”. A new category of general clearing participant entitles the Russian and foreign financial companies to provide clearing services to traders, as well as other Russian and foreign banks, companies and individual clients, perform operations on MOEX FX. It is planned to further develop the technologies of Direct Market Access (DMA) and the improvement of services for the clearing participants. SMA (Sponsored Market Access) Service provides market participants with a full access to the software and hardware complex of the Exchange. Removing barriers and bringing technology to the SMA standards will attract to the market conservative groups of clients, including foreign investors. Market development projects: DMA, SMA and International Clearing Membership (ICM) should significantly enhance the ability of non-resident operations in the foreign exchange market and facilitate the movement of OTC offshore turnover on Moscow Exchange.