Dmitry Kay, Co-head of EM FX Trading, Europe at UBS speaks to Markets Media about the challenges in achieving best execution in turbulent markets.
What is your professional background, and what is your current role at UBS?
I’ve been trading for over 15 years and always focused on emerging markets (EM). I started in the fixed income space with rates, bonds and derivatives, and for the last decade in foreign exchange. My area of expertise is the EMEA region, most notably Russia, but I cover all EM global markets, and more recently I have been delivering improvements to our existing emerging markets electronic FX offering, including enhancements to our STIR, Swaps, and NDF offering to clients.
How would you define best execution in EM FX?
Best execution in emerging markets should be seen in exactly the same way as developed market currencies. The principle should always be to exercise reasonable care to execute for clients and what is fair in the marketplace. At UBS we follow robust standards and have signed up to the global FX code of conduct. This has helped us define best execution, how we implement it and what our clients can expect from us.
What are the main challenges in achieving best execution in EM FX?
The main challenges in emerging markets are the lack of liquidity and market transparency in comparison to developed markets. There is less price visibility and fewer transactions taking place. Additionally, there are regulatory blocks, such as credit line constraints and the impact of political sanctions. This makes it extremely difficult to define what the right price should be, or what the right and fair execution level is.
How does FX best execution differ between emerging and developed markets?
The price is important, but it’s not always what matters most in best execution in EM. There are factors aside from price that clients value, especially settlement, the timing of execution and market impact overall. So, it’s not just achieving the best price, it’s about achieving the best experience overall that positively impacts the requirements the client set out.
How has the volatility of 2022 affected EM FX?
Obviously, this has been an unprecedented year in areas of emerging markets FX, as the onset of market sanctions has affected access and liquidity. The result has been the widening of a lot of spreads, increased volatility, and it has made the partnership approach more important than ever in executing FX. Clients needed their bank partners to help them navigate the headwinds and ensure minimal impact on their FX books, which is why it is important to strategically partner with a bank that has a long-standing pedigree, global reach and expertise across both EM and developed market currencies.
Is EM FX moving toward lower-touch trading?
Yes, and no. Emerging markets FX is a very broad concept, so it depends case by case. For example, with the Singapore dollar, I would say yes, that is moving towards lower touch trading because it interacts with the market in a similar way to a G10 currency.
At the same time, some emerging markets could be seen as regressing. For example, Russia, Turkey and others where liquidity issues have been extremely challenging and existing technology isn’t sufficient for such market volatility, you will always need the insights of the trader. However, as technology matures you should see more lower touch trading in emerging markets.
What is the importance of relationships in EM FX? Does a trading firm need to be ‘on the ground’ in EM?
Relationships, and knowing what drives the client trading strategy, are always key to delivering successful outcomes. It’s about achieving the whole package of services, including providing market colour and research, timely and consistent execution, settlement of transactions, and ensuring that in case of distress, that clients are well guided as to their options.
Due to the global nature of the FX market, having onshore access has its benefits but is not critical in today’s highly connected market. At UBS we are set-up in all major hubs and have expertise right across the breadth of developed and emerging market currencies, which means we can interact and service our clients’ needs regardless of time zone or contact point in the bank.
What’s important about execution channels in EM FX?
We have seen a trend where liquid EM has been moving from principal trading towards algo trading. This is a trend that seems to be picking up pace. Algo offerings in EM will improve as a result of new technology and investment in this space, but there is still caution as to how this will expand into less liquid EM. For example, in non-deliverable forwards, where the current algo offerings are still quite limited, but demand from clients is growing. The future will see the transition of existing technology in G10 and more liquid EM, into less liquid EM.
How does UBS distinguish itself in EM FX trading?
It’s about building strong relations with clients by focusing our efforts on where we can deliver and create value. We offer a full service offering across all regions and across the product suite that is underpinned by our market pedigree, models, data, and technology. Our EM and G10 franchises work closely together to ensure our clients receive seamless coverage across all currencies, and by doing so, can apply the same models that have been highly practical and helpful in building our curves and pricing tools, and streaming prices.
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