Heston-wannabe Jon Vollemaere, CEO and Founder of R5, a new interbank liquidity pool for electronic trading in emerging market currencies, explains why the sector is set for lift-off.

Screen Shot 2014-05-21 at 11.56.02What has hampered the development of electronic trading in emerging market currencies? And is that about to change?
From an electronic point of view EM has been unloved and overlooked for a long time – that’s been mainly due to a lack of liquidity, credit and ability to warehouse EM risk. That creates a fantastic green field opportunity to take the best parts of eFX and apply them in a sensible way. As a result several banks have begun to turn their e-tools in the direction of EM currencies. We’re in the process of moving this market from voice to screen across multiple pairs, but it’s certainly the renminbi that’s leading the charge.

To what extent have investors been caught off guard by the pace of the internationalisation of the renminbi?
I think many participants didn’t think they needed to pay much attention to the renminbi until it got closer to full convertibly – arguably sometime around 2020. But – this year has already seen a widening of the currency’s trading band, economic news and intervention from the People’s Bank of China which has brought volatility to what was once considered a one-way bet. That has attracted a lot of fresh trading interest, and many banks were unprepared for that.

What is the potential for the Chinese currency?
The same as the country itself – quite large! In a very short time it has come from being buy neur online just another NDF currency to setting records on SWIFT, BIS and as a trade buy escitalopram 10 mg currency. I believe its effect on FX and capital markets will be the same, if not more, than that of the euro when it came into existence.

What other emerging market currencies are likely to follow the renminbi towards internationalisation?
I’m sure there are several central banks watching the CNY to CNH story closely, and looking to follow the example. Whilst each economy is very different the phased approach has worked very well so far.

What benefits will that deliver?
Essentially it gives an element of control to the central bank – something very important and appealing to them. It gives protection and access to international capital at the same time.

What part can electronic FX play in protecting currencies from the fallout of regional financial crises?
You could argue that the lack of depth and liquidity in EM currencies is what causes them to be quite choppy. By going electronic and smoothing trading friction you get more participants, more trading and more liquidity. As well as a bigger cushion for any shocks as a result. Short-term NDFs could potentially work quite well as exchange traded instruments. That would also give the onshore authorities a level of control they don’t have with offshore OTC trading. As well as regulatory oversight and easy access for local trade and hedging needs. Any crisis is going to be led by underlying economic factors and the short-lived discussion of another Asia crisis earlier this year just shows that a number of Asian EM countries do stand on their own merits.

If it wasn’t for FX, how do you think you would be earning a living?
Celebrity chef.

Article published in FX-MM