NDF algos have been available for over two years, but until recently the availability has been mostly focused on currencies from the Asian hemisphere, such as Korea, India, Indonesia and Taiwan. More recently, we’re seeing the emergence of Brazil and LatAm currencies and on the back of client interest, we released our BRL NDF algo in the summer. However, a key difference when it comes to trading BRL is liquidity access, which in the OTC space is fairly limited and the spreads offered to clients haven’t been as competitive as those available if they traded on-shore on the main futures exchange, the Brazilian Mercantile & Futures Exchange (BM&F). In order to unlock that liquidity for our algo clients, BNP has leveraged its local presence to trade the BRL future on the BM&F. We then take that futures transaction and book it as an NDF so the client can trade against that sourced liquidity using the BRL NDF algo.
This is a unique approach to solving the liquidity issue for clients who want to trade large BRL orders. The demand for the BRL NDF is very high and, since its launch, it has rapidly risen to become the most actively traded NDF currency pair on the platform by a factor of three. For the first time, clients are also able to post interest into the market and capture that spread rather than pay it. The algorithm is proving to be very good at sourcing liquidity in a passive fashion when trading on the BM&F. Around 70 to 80% of our fills are on the passive side, which means that this is a highly effective way for clients to trade better than mid and significantly save on their execution costs. In addition, although we’re sourcing liquidity against the future which has a fixed settlement date, we’ve recently developed a unique solution which
allows us to roll to any value date the client wants to trade against. This provides reassurance to clients that they are still able to use the algo technology to trade any date of their choice, with the algo essentially sourcing its liquidity from the futures contract but being able to execute in parallel with a swap.
Our continuous swap hedging feature was launched specifically for NDFs and provides a solution to clients who are concerned about the settlement date of the future not matching the date they require, in which case they would have needed to do a swap transaction to go to the date they wanted, exposing them to market risk on the swap before the algo rate is locked in. With our continuous swap hedging feature, we instead run two algos in parallel, one which is executing the core liquidity in Brazil against the future while the other is periodically trading the swap points throughout the execution. This achieves a blended average of the swap points and an all-in rate for the NDF liquidity, which roll together to give the client a more
Now, we are also extending the algos capabilities so that instead of solely being able to trade against the dollar, as is typically the case, we have introduced the ability for clients to trade against Euro and Sterling crosses as well. For those clients who are based on shore and want to trade directly on the BM&F, they can now also use our algorithm to trade that marketplace and book those trades onshore against their local entities. We’re the first bank to ever offer that service to clients on the ground. Looking ahead, we will continue to go where the client demand is, so the next pair we are looking at introducing to the suite will likely be the Colombian peso (COP).