REGIONAL e-FX PERSPECTIVE

Regional e-FX perspective on the Middle East

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Middle East
By Richard Willsher

Regional e-FX perspective on the

Electronic foreign exchange trading made a slow start in the Middle East. Take up is now well advanced in some sectors and some countries, though a lack of infrastructure, varying degrees of regulation and local civil and political disturbances paint a mixed picture across the region as a whole.

f we de ne Middle East to include the entire Arabian peninsula encompassing the Gulf, Iran, Iraq, Syria, Jordan, Lebanon Turkey, Israel and Egypt, it is region with massive foreign exchange needs. On one side the largely US dollar denominated receipts from the sale of hydrocarbons, on the other the import bills for manufactured goods and infrastructure developments produce huge foreign currency liquidity while local currency requirements also need to be met. Add to these trade requirements the appetite for foreign exchange trading and speculation and the Middle East region ought to register more prominently than it does. e latest Bank for International Settlements Triennial Central Bank Survey groups Middle East and Africa as one, and last among all regions for the size of its average daily turnover in spot transactions as at April 2010 with just $13 billion out of a total of $1.8 trillion. Across all product categories the region accounts for $41 billion out of $5 trillion globally. Yet look below the surface to the economics of individual countries and stats from the

International Energy Agency show that in 2009 Saudi Arabia was the worlds largest net exporter of crude oil with Iran, United Arab Emirates (UAE), Iraq and Kuwait all in the top ten. Similarly Qatar is third in the league table of net exporters of natural gas. ese countries continuing currency in ows seem assured given their vast reserves and the inexorable rise in the cost of energy. Moreover, companies that operate in the region, especially in the oil and gas sector, logistics, transport and nancial services are world leaders with sophisticated understanding of treasury management, including the use of foreign exchange operations and electronic management and trading tools. What quickly becomes clear however is the fragmented and patchy nature of both FX e-trading in the region and the legislative and technical infrastructure that facilitates it country by country. Generalisations about the region have to give way to country speci cs and to business models and products geared to segmented client groups.

Buy-side clients and business models We have a double coverage model, explains Deutsche Banks Head of CEEMEA FX sales Amine Berraoui. As a bank we cover both nancial institutions and corporates. Our corporate franchise follows our footprint and geographical presence. We have a fullyedged license at DIFC in Dubai as an o shore bank. We have an onshore license in Abu Dhabi. We have a presence in Qatar, and a local presence in Saudi. e rest of the countries

we didnt feel it necessary to have a local presence in and we cover out of London. Our strongest markets in the region are UAE and Saudi Arabia. Barraouis colleague Robert Wade, who is head of electronic FX corporate sales for EMEA & Americas, says that the banks Autobahn platform is an expanding franchise. As the sophistication level of our clients increases they are making greater use of Autobahn. is applies to the largest of local corporates. ey are looking for simple, easy work ow. Everything else is covered out of our voice team. But interest in electronic is absolutely growing.

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platforms, like Bloomberg FXGO, to manage their FX risk, make requests for quotes and execute their FX trades, thereby minimizing the manual processing of transactions. is is forcing competition upon forex platform providers. Van Name adds, Institutional buy-side clients in the Middle East have banking relationships with local and international banks, which cater to clients FX requirements by di erent means. Whereas the majority of FX business conducted with local banks is executed traditionally, over the phone, large international banks are responding to increasing market demand for electronic platforms and e-commerce services. is shift towards e-trading is driving larger local banks to invest in e-commerce o erings, and we expect to see them start providing their own e-trading solutions to their buy-side clients. is view is corroborated by Johnny Nielsen, head of institutional business in Middle East region at Saxo Bank. We have remarked a strong interest in the relation to our White Label solution, actually from most of the Middle East region. We have recently

e Middle East is a region where you have some of the largest sovereign wealth funds and some central banks with signi cant liquidity, adds Barraoui. ese are looking for more and more services especially those that are electronically delivered, so I see our FX platform, other platforms and other electronic services being well positioned for growth. is view is echoed by Citis Sandip Sen, CEEMEA Corporate e-Sales Head. Most of government-owned companies as well as corporate rms have adopted electronic trading over the last few years mainly for non local currency FX exposures. e constant demand for best execution, coupled with integrated pre and post trade services, reinforces the need and hence the growth in the use of electronic trading channels. Tod Van Name, global head of Bloomberg Foreign Exchange says that the Middle East as a whole has lagged in the adoption of e-trading, but this is changing quickly. Many large corporations in the region are analysing their treasury management systems and are looking at how e-commerce can address issues like best execution and audit trails. Corporate treasurers are turning to multi-bank
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Sandip Sen

Most of government-owned companies as well as corporate rms have adopted electronic trading over the last few years mainly for non local currency FX exposures. e constant demand for best execution, coupled with integrated pre and post trade services, reinforces the need and hence the growth in the use of electronic trading channels.

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seen increasing interest for non-domestic markets, in particular for international equities, futures and FX, all of which are available to trade via our award winning platforms in a single account. Our White Label solutions are also receiving increasing attention from non-retail end users, including funds, private banks and bank trading desks Nielsen continues. is is further supported by our investments in Saxo Direct an API (application programming interface) liquidity o ering tailored to retail brokers, asset managers and hedge funds. All clients are essentially looking for similar ingredients to ensure that their trading needs are met: transparency, e cient execution, standardized pricing and anonymous trading. Moreover, they want quality service from market professionals as well as a reputable partner. ere has been a de nite shift of the large corporates and a good chunk of the interbank market towards multibank providers, like ours, says Alex Johnson, sales manager Middle East/Africa at 360T. e role of the treasurer in the Middle East has changed dramatically in recent years. e treasurer of today faces more challenges and needs, and uses a broad range of tools to help him manage his companys

Shariya explained
Islamic nancial instruments must be governed and structured according to principles and ethics approved by Islamic scholars as being compliant with Islamic or Shariya law. e most widely known aspect of this is that earning interest or riba is prohibited. Lenders and investors must share the risk and the return. is is termed mudharabah. is di ers from conventional lending which provides the lender with a xed pro t, whether or not the nanced business is successful and is not regarded as true risk sharing. Speculation or maisir is prohibited. Tangible asset backing for transactions, such as those involving property helps to avoid such speculation. Uncertainty or ambiguity termed gharar is to be avoided. Investment or any aspect of business must not involve goods or situations that are disapproved of under Islamic faith, such as those involving alcohol, gambling, pornography or pork products. Islamic nance products have to receive a fatawa or approval from a board of Islamic scholars. Permitted transactions are termed halal. It is here that some criticism has been levelled at some Islamic nance structures, in particular at some sukuk, or Islamic bonds, because there are no global standards for such structures. exposure and nances. Key requirements such as e cient straight through processing (STP) to treasury management systems and audit logs of quote histories necessitate electronic trading. At 360T, we have concentrated on speaking to and gaining local market makers onto the platform as well as the traditional global players, thereby giving clients a choice of banks. Many large corporates especially seem to have developed very quickly in the past couple of years in this respect, leapfrogging some evolutionary stages that European or American corporates went through on their journey. ey have even jumped to using the

Johnny Nielsen

All clients are essentially looking for similar ingredients to ensure that their trading needs are met: transparency, e cient execution, standardized pricing and anonymous trading.
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intra-group tool, which allows a central treasury to manage, control and execute requests of satellite subsidiaries.

no licensing.

erefore many clients work on-line.

Regulation, relationships and Shariya law So the large corporate and institutional sectors across the region as a whole represent a signi cant and growing market. is is being addressed by major international banks and platform providers and the local banks are playing catch up, well aware that electronically delivered services are the way forward and they need to compete. However no one is saying that the region is an easy one in which to build e-business, not least because of restrictions and regulation of forex trading.
e most important thing about forex trading at the moment is regulation, explains Ahmad Khatib, CEO of Beirut based Amana Capital. Regulation is not uniform. Some countries have little or no regulation others impose restrictions.Lebanon, for example, has a very strong nancial sector historically and was advanced in introducing a regulatory regime for foreign and regional investors. e UAE has introduced licensing for foreign exchange trading o shore. en Saudi Arabia has the largest number of potential traders but

Add to this the traditional, cautious Middle Eastern approach to business based on relationships and the need for transparency, and this can pose problems both for dealing with nancial brands that may be well known in the west but not locally and also embracing new technologies which o er no human interaction. is is particularly true of the retail sector, where FX Solutions has been building its business since 2004. We at FX Solutions recognize that everything with regard to the Middle East is based on trust and reputation. Bottom line, the relationship is key, says CEO Michael Cairns. e market in the Middle East is relationship driven and the role of the introducing broker (IB) in forging those relationships cannot be underestimated. From the outset we decided to utilize the IB network and our IB partners have helped contribute to our growth and success in the retail sector. ey are our sales force on the ground for the most part. For example, he continues, a typical client will visit a companys website but then go and talk to someone who has done business with that company. at someone is usually an IB. Its word of mouth, its validation. Blogs and forums are very important, perception is everything. People are concerned about the safety of their funds and wont just sign up on-line without doing a background check. If they know someone who knows us, who recommends us, then they feel more comfortable and are likely to open an account. It helps that FX Solutions has worked hard to build a strong brand and a reputation based on innovation, on fairness and on total transparency. Cairns adds, FX Solutions has had particular success in Saudi Arabia but it was, and is, important to slowly build

and is surrounded in uncertainty and lack of clarity. ere are a number of approaches to this issue. Shariya in general does not give one a clear set of rules governing forex trading, says Amana Capitals Ahmad Khatib. Forex is relatively new and there is a lot of client demand. What discussion there is, is about swaps and interest rate products. Regarding speculation, anything undertaken without proper knowledge and understanding would be speculative and would necessarily fall foul of Shariya principles on gambling. at is why we o er educational services alongside our technical products and services. FX Solutions has consistently adopted a cautious and respectful strategy where Shariya is concerned. Over the years, we have spoken with many of our partners in the region who happen to be religious scholars and have sought their advice on how best to approach this market, says Michael Cairns. ese discussions, for example, led to our providing interest-free accounts to clients in the region. Whilst we have done our due diligence to provide Shariya compliant markets we are aware that our clients have also done their own due diligence. Many of our IBs provide online tools to assist clients in this regard.

Tod Van Name

e electronic aspect of Shariya-compliant trading is still nascent,because market players do not have the scale and footprint to warrant investment in the technology required to o er FX and deposit-executable prices. con dence among regulators in order to be able to gain credibility. In Saudi Arabia the monetary authority is understandably very wary of new markets. ere is intense scrutiny of business practices and participants with a view to both protecting their citizens and making sure that their laws and regulations are upheld. e onus is on us to convince the authorities that we deserve their trust. is in itself isnt a bad thing. A history of regulatory compliance is vitally important in this regard and it helps to point to our record in the US, where we are registered with the CFTC and an NFA member, and the UK (FSA). Saudi Arabia remains very strict nancially and the barrier to entry is high. Apart from anything else, a company requires more regulatory capital to register in Saudi Arabia than to register in the US. Its not only the money, the relationships are important also. at being said, weve seen encouraging signs in the past few years that the retail forex market is perhaps opening up and gaining acceptance. FX Solutions has participated in several trade shows where interest in our product was high. Perhaps the door, whilst not fully open, is slightly ajar? Although the common perception may be that Islamic or Shariya principles restrict the development of forex trading in the region, this is not a consistent picture

Robert Wade

In the Middle East and Africa the connectivity issues are still there. It varies country to country. Where the infrastructure is not as good, you often see clients and banks investing in dedicated lines, leased lines etc. to provide connectivity.
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e electronic aspect of Shariya-compliant trading is still nascent, says Tod Van Name of Bloomberg Foreign Exchange, because market players do not have the scale and footprint to warrant investment in the technology required to o er FX and depositexecutable prices. Bloomberg o ers a wide range of information, news and data on the Islamic capital markets, and is working on integrating Shariyacompliant products, such as Islamic deposits, into Bloombergs multi-bank trading platform. is will enable market participants to conduct business on an electronic platform without the nancial and resource investments they would normally need to make. Shariya products are by de nition a very important area, explains Saxos Nielsen, however FX trading is more than a question of interest rates. Aspects such as margin trading, shorting etc have also to be taken into consideration. Any introduction of Shariya compliant products will be in close cooperation with bodies that ensure the compliance of the o ering. On other instruments, such as equities we have recently given clients the possibility of analyzing equities to monitor their compliance. is feature has been very well received and indicated the strong interest for such products.

trading capability through phone and tablets requiring no minimum account size. Unlike international banks, regional banks have not really taken this up. is view is echoed by FX Solutions Cairns who also notes that client types di er signi cantly market-tomarket. Retail traders in Saudi Arabia tend to be a mix of individuals and successful business people, some extremely wealthy. Account sizes tend to be larger than the norm which, in turn, leads to larger deal ticket size. In Egypt, where trading is very active, the client base typically comprises more of those who start trading with minimum account sizes of $250-$1,000 utilizing FX Solutions available leverage of up to 400:1. We see Egypt as more lower equity accounts but with a lot of traders. e accounts may be smaller but they tend to be more active. In Saudi, by contrast, we have clients who are trading very large positions, some probably larger than the banks you are talking 50m - 100m at a clip, Cairns explains. In Saudi, he continues, there is a tremendous quest for knowledge and an embracing of the latest technology. ey are very interested in technical analysis and like to use charts to help with their trading decisions. e UAE, although seemingly more westernised, doesnt produce a huge number of individuals looking to trade right now but we are actively targeting that region. With Lebanon, on the other hand, the issue is more one of (US and UK) government restrictions on accepting clients from that country, possibly due to its proximity to Syria. We are bound by the laws and regulations, not only of those counties in which we operate, but of those countries in which we are registered and regulated. If you look at Turkey you have a similar trading mentality as that in Egypt or Saudi Arabia but the government there has clamped down on rms operating without a physical presence in Turkey and without registration. ey have made registration extremely di cult and costly. ings can change dramatically but in the countries where we are most accepted there seems to be a willingness to embrace what we do. eyd rather

be part of it and regulate it rather than force it out of existence with restrictions. Another reason for the popularity of retail trading of forex has been disappointment with other asset classes. Retail traders and investors have not seen great returns from local stock markets over the past few years, notes Michael Rautmann, Head of Marketplaces, FX&FI for Middle East Africa and Russia, omson Reuters. is has led to an increase in the number of participants in the FX market, and since many of these investors are already used to using electronic platforms to trade equities, a switch to FX is relatively simple. Moreover, Bloombergs Tod Van Name adds that there is a large appetite for risk in the Middle East retail market where traders operating across time zones look to their FX providers to o er 24-hour trading without loss of liquidity. However while the retail sector largely trades the major currency pairs there is some appetite for links with other asset classes such as commodities, futures and stock indices.

Alex Johnson

We have launched an Islamic Multibank Trading Portal for FX Spot o ering Islamic banks and corporations the opportunity to embrace electronic trading whilst adhering to Shariya principles, Meanwhile 360T has also taken a pro-active approach, We have launched an Islamic Multibank Trading Portal for FX Spot o ering Islamic banks and corporations the opportunity to embrace electronic trading whilst adhering to Shariya principles, says Alex Johnson. We were the rst and, until now, the only multibank platform provider to o er an Islamic Platform.

Ahmad Khatib

e most important thing about forex trading at the moment is regulation. Regulation is not uniform. Some countries have little or no regulation others i mpose restrictions.
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Retail FX Talking to people active in providing FX trading services in the Middle East region also produces a more pragmatic approach to Shariya-approved trading. In essence clients, particularly on the retail side, for whom Islamic principles are important will either choose approved products and structures or will not trade. Others who are less concerned will use available platforms and perhaps o shore centres, such as Cyprus, to trade as they wish. Traders and investors will let conscience be their guide. What is clear is that retail customers across the region are increasingly attracted to the simplicity, and perhaps the excitement, of trading forex on their own account by electronic means.
Retail / day traders are a group that is expanding rapidly having started late, says Ahmad Khatib at Amana Capital. Now they are looking for mobile

Specialised services At the other end of the scale, development of wholesale services such as prime brokerage and growth in high performance algorithmic and high frequency trading seems not to have reached its tipping point as yet. Algorithmic and programmatic trading has become extremely popular globally, but less so regionally as volumes are still relatively low, says Rautmann. We have however seen a move to liquidity aggregation tools, such as omson Reuters Dealing Aggregator and FXall, which allow FX traders to view all of the various sources of liquidity on one screen. As aggregation gains popularity in the region overall liquidity will increase, traders will start to embed aggregation in their strategies, and this will encourage more price makers to participate in the market and therefore drive algorithmic trading in the future. Bilateral credit has also been a problem for medium to smaller nancial institutions in the Gulf, which make PB o erings attractive.

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Israel
e Israeli foreign exchange market has been characterized by the arrival of new players into the market, challenging the domination of the major banks. While this led to better terms for customers it also led to sharp practice and scamming. e Israel Securities Authority is currently in the process of shaping new, more stringent regulation, which some in the marketplace fear may disadvantage smaller and non-bank providers as the new rules will not apply to banks. In many ways the character of the countrys foreign exchange market resembles those other smaller Middle Eastern foreign exchange markets with relatively modest turnover dominated by the major currency pairs and by the US Dollar. On the other hand the sophistication of the countrys IT infrastructure, the vibrancy of its business community and its nancial sector de ne it as similar to a developed, if smaller, European market. e introduction of new regulation will be a pivotal moment in the development of Israels forex market which will determine not only its future integrity but also whether it will drive trading o shore.
Source: we are indebted to Forexmagnates.com, a website which covers the Israeli foreign exchange market, for background for this section

Eugenia Hanoune

HFT is not as prevalent in the Middle East as in the western markets. As volumes and processing time for trades increase, the conversations about Prime Brokerage seem to be happening more and more. ere is a feeling that many more rms will require Prime Brokerage services in future. Bloombergs Van Name believes that these markets are well starred for future growth. In a global market where Western nancial institutions continue to su er from reduced lending, defaults, rogue trading and economic contractions, many rms are seeking business relationships with Middle East banks o ering superior credit positions and ratings. ese institutions are taking advantage of these global shifts and establishing specialist services such as PB divisions. It is likely that in the near future, new regional players will emerge o ering PB and HFT services to the FX market, he concludes. ere is some interest for FX algo trading and this seems to be growing more recently, echoes Citis Eugenia Hanoune, EMEA Institutional e-Sales Head. HFT is not as prevalent in the Middle East as in

the western markets. As volumes and processing time for trades increase, the conversations about Prime Brokerage seem to be happening more and more. ere is a feeling that many more rms will require Prime Brokerage services in future.

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Regional e-FX perspective on the Middle East

ere is uncertainty of the impact that regulation, particularly in relation to OTC derivatives trading recommended for G20 countries, such as those required by the Dodd Frank Act in the US, says omson Reuters Michael Rautmann. ese G20 reforms look to change the OTC derivatives trading work ow, increase transparency, and create greater supervision of banks.With Saudi Arabia being part of the G20 and with the UAE Central Bank advising regional banks to meet liquidity requirements by 2013, in preparation for Basel III, the regulatory impact on regional markets cannot be discounted. Many regional nancial institutions need to not only understand how local regulation will a ect their participation in FX markets, but also how it a ects their relationships with nancial institutions who they trade with based in Europe or the US. ere may be no local regulations governing OTC derivatives trading in a speci c country, however a banks international counterparty could be forced by legislation to trade on a regulated platform. is not only creates complications for nancial service institutions but also the providers of trading tools to these organisations. For this reason omson Reuters has worked closely with legislators and regulators to ensure that we fully understand the policy goals and proposed changes, and we will be

Qatar while by common consent Saudi Arabia is making huge e orts to upgrade its telecoms capabilities.

Michael Rautmann

Future prospects Everyone we spoke to in our research for this regional perspective was upbeat about the rate at which interest in forex products and their electronic delivery was growing. ere was general optimism about how the Middle East still had some distance to go before it ful lled its potential but there are some headwinds. Some of these originate in the region itself and others from beyond its shores.
From the countries themselves comes fears about political stability. Syria, Iraq, Iran, Bahrain and Egypt are all the subject of upheavals or circumstances the outcomes of which are uncertain. Lebanon while stable itself and a favourite business and nancial centre for the Middle East has also seen initial overspill of tension from the con ict in Syria which the Lebanese authorities have been keen to staunch and quell. Several commentators have suggested that the turmoil in Bahrain has put the brakes on its growth potential as a leading Gulf nance and banking centre. Others have suggested that the nancial crisis linked to the property crash in Dubai may have damaged it as well, if only temporarily. Meanwhile as countries such as Jordan, Lebanon and Israel (see panel) among others have sought to introduce greater regulation across nancial markets in general, including over the counter (OTC) forex and derivatives, the winds of regulatory change have often blown in from abroad.
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Retail traders and investors have not seen great returns from local stock markets over the past few years. is has led to an increase in the number of participants in the FX market. registering our omson Reuters Dealing product as a regulated service in Europe (MTF) and in the US (SEF). An additional headwind is the state of the communications infrastructure in some geographies. In the Middle East and Africa the connectivity issues are still there, according to Deutsches Robert Wade. It varies country to country. Where the infrastructure is not as good, you often see clients and banks investing in dedicated lines, leased lines etc. to provide connectivity. Over time, as governments continue to invest further in their infrastructure, this will just enhance the capability that is available to clients across the region. Most of the large institutional players would have dedicated lines. e ones that are most impacted would be mid-market or local corporates. We have infrastructure, resources and people in the Middle East. We are investing in our platform globally. We believe that there are good growth prospects in the region in general particularly in UAE and Saudi. National communication infrastructure will play a critical part in de ning the market, believes Bloombergs Tod Van Name, creating natural hotspots and notspots, as the gap widens between countries with fast and reliable Internet connections and those without. ose with good infrastructure include Gulf states such as Dubai, Abu Dhabi and

Growth and product development On the back of this the range of products on o er across the region is set to grow signi cantly from vanilla spot and forward between the majors. Johnny Nielsen of Saxo says he sees further growth opportunities in the majors (FX Spot) as well as spot metals and oil futures. We recognize further growth opportunities in other assets classes such as CFD commodities and contract options. Our White Label solution enables end-users to bring their existing portfolios to the platform and seamlessly expand their trading activities into other asset classes. Having a broad white label client base in the Middle East, EU, APAC and Eastern Europe, spot FX trading and bespoke currency availability is essential. Expanding our exotics and precious metals o ering such as AED, BHD, QAR, KWD, SAR, OMR, JOD, RUB, HUF, RON, LTL, PLN, CZK, MXN, ZAR, HKD, XAU and XAG helps us meet our clients localized product needs. With more than 160 crosses including all majors, spot metals and regional exotics Saxo Banks liquidity distribution services generate EUR 2,160 billion in annual FX volumes.
So far the only exchange o ering currency futures in the Middle East is the Dubai Gold & Commodities Exchange (DGCX), where, according to 360Ts Alex Johnson, volumes are thin. Most trading is OTC and predominantly in vanilla products. Some more sophisticated corporates are involved in structured options but this is by no means a big market. However with the growing power and sophistication of large corporates, central banks and sovereign wealth funds in the region these could be set for growth. Across the region there is no doubt that we can expect further development of forex products on e-platforms. One issue that constantly arises, especially in light of regulatory change, local restrictions and political unrest is the extent to which trading generated by Middle Eastern clients of all shapes and sizes from major corporates to retail traders will remain onshore or be conducted through major global nancial centres such as London or New York or o shore centres such as Cyprus. E-trading capabilities can facilitate this process and removes the need for regionalization of trading. at however is as di cult to quantify as it is for local authorities to control, and is the subject, perhaps, of another story altogether.
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Michael Cairns

everything with regard to the Middle East is based on trust and reputation. Bottom line, the relationship is key,

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