FX Markets Best Banks Awards 2021: Best bank for regional/domestic banks – BBVA

Winner: FX Markets Best Banks 2021 Awards

An unwavering commitment to providing liquidity to smaller banks at competitive rates and allowing them to extend the liquidity to clients digitally garnered BBVA its win at the FX Markets Best Banks Awards

Luis Martins, BBVA
Luis Martins, BBVA

While market dynamics and behaviours broadly resumed their pre-pandemic form during the course of 2021, the boost in electronic trading and communication that was spurred on by the onset of Covid-19 in 2020 nonetheless remained strong.

Electronic trading was such an important source of liquidity when spikes of volatility hit FX markets in March and April 2020 that, when the dust settled, those that had previously preferred to trade through their sales traders didn’t automatically revert back to their old ways of trading.

“In 2021 we saw the confirmation that digitalisation of markets was not a temporary effect, but a permanent one,” says Luis Martins, global head of FX and Group of 10 rates at BBVA. “The acceleration that we saw in 2020 didn’t return to 2019 levels. We saw many clients adopt digital tools to execute, trade and interact with the bank more broadly. In spite of the normalisation of market microstructure and dynamics, digitalisation is here to stay.”

Martins explains that the pick-up in electronic means of trading was particularly apparent in instruments such as FX options and non-deliverable forwards (NDFs), which had lower rates of electronic executions before the pandemic hit compared with spot, forwards and swaps. The adoption was widespread across emerging market currencies save those that experienced high levels of volatility due to idiosyncratic events, such as the tense presidential election in Peru or ongoing developments in Turkey.

And while the Asian NDF market has already achieved a high rate of electronification, it is in Latin America where growth is most likely to occur. This is particularly true for the already well-developed NDF market in Brazil, but also for the Chilean market where regulations rolled out in 2021 made it easier for non-resident institutions to make liquidity in Chilean pesos in offshore markets.

In light of these developments and to reflect BBVA’s commitment to the Chilean market, the bank recently opened a representation office in the country to facilitate the provision of liquidity in Chilean pesos to its international clients.

Longer tenors on the rise

In 2021, BBVA also saw a material increase in demand from its clients to consume longer-dated tenors in G10 FX swaps and forwards electronically, even for less common tenors of five years or more.

Clients tended not to execute those trades electronically because there wasn’t enough capacity on the sell side to meet the demand, which made electronic execution on the whole difficult.

“I think that banks are now feeling more comfortable quoting these tenors electronically,” says Martins. “More and more players have now entered that space.”

“That illiquidity was the result of the institutional setup of many banks,” he explains. “Those that had a very fragmented or very rigid separation between the FX and the rates businesses were less likely to quote longer-dated tenors because the teams responsible for doing so often fell under different lines of business.”

“At BBVA we have joint operations between FX and rates traders, so we can easily quote such tenors. I think this type of institutional setup to provide electronic liquidity is getting more common.”

Struggle with FX liquidity provision

While domestic and regional banks widely trade FX instruments as liquidity takers, they often find it more difficult to extend this liquidity electronically to its own clients. On one hand, their limited client base makes the technology investment required for doing so rather prohibitive. On the other, liquidity is harder to come by for them than other players in the market.

Many smaller banks often partner with larger banks such as BBVA – and technology providers – to complement their technology stack and provide them with adequate liquidity.

“There is a clear distinction between the liquidity that is offered to corporate clients versus regional banks from global FX providers,” explains Martins. “Because the global providers see them from a holistic perspective rather than just FX, in most instances large corporates can access liquidity today that is more competitive than a smaller bank can get. But at BBVA we are committed to local banks in our markets and offer them liquidity.”

Market participants voted BBVA as the best FX bank for regional/domestic banks at the 2021 FX Markets Best Banks Awards.

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