EDITORIAL: The State Bank of Pakistan (SBP) has introduced a new foreign exchange (FX) electronic trading platform for interbank trading. This is in compliance with the commitment with the IMF (International Monetary Fund) to strengthen transparency and efficiency in the FX market.
This indeed is a good move as this would improve the visibility of the PKR/USD exchange rate movement. Currently, market trading is routed through brokers, direct telephonic deals between treasuries of banks or through bilateral trading system between two banks. The bulk of the trades are, however, routed through brokers. Now a centralized FX trading platform will be used across the board in the interbank market, which is to be made effective from 29th January 2024.
SBP has described this facility as ‘FX Matching’. The market would be using Refinitiv Matching and Electronic Broking Services. It is one of the most used multi-dealing market platforms in the world, and in Pakistan banks’ bilateral systems are already on this platform. In the Refinitiv FX matching module, trading takes place on an anonymous basis where everyone can see the bids and offers and deals being made on the system based on the best quoted rates. If a bank enters a bid, the other bank only gets to know about the bidder once the deal is matched. And all the banks operate within their given respective limits, which are set between banks to mitigate settlement and credit risks. In this system of trade, no bank or broker can manipulate the others. For example, under the present system, if a bank comes to the market, who is usually a buyer, the other banks offer higher rates as they know the bank’s name and its need. With anonymity in the system, no bank or broker can manipulate other participants in a trading market that is so thin.
This is a welcome move and would help in improving the transparency and visibility of the Pakistan FX market. The FX market participants have mixed views about it. The treasury traders that have international exposure are all praise for this development, as they think it’s a good transition for them from the current broker-mediated trade where there is no real time rate in the market. The usual quotations (screenshots) that circulate in social media usually depict any single trade (or quotation which could even be wrong) and add to the confusion.
Now, there cannot be any side deals between two banks because if one is buying cheap dollars, everyone will get to know, and anyone can buy at this rate. This would result in better price signaling and price discovery. Whereas, currently, the system is working on hearsay and it becomes exploitative in times of volatility. Customers, particularly importers, complain that banks charge high spreads. With more transparency in the system, traders in every bank treasury would have access to the real time rate, customers can cross-check the rates from various banks and it would be difficult for anyone to manipulate the market.
Globally, this (or other trading) systems are being used, and international players dealing in Pakistan can see prices and volumes. This would help to build confidence for international market players in Pakistan (especially the hot money players). The other benefit would be to have better transparency in liquidity management of SBP (injection or mop-up) in days to come.
Some treasury participants do not like the new system. They think it is micromanagement, as this would allow SBP to watch every deal. They think SBP just wants to keep an eye on banks’ real time trades. Their frustration is perhaps due to SBP’s micromanagement in days of low FX reserves, which has been a norm for the past eighteen months. They perhaps are right in the current scenario where banks are being asked to virtually square the inflows and outflows and are not allowed to freely buy from the market. However, when the sunny days come, utility of the new system would, hopefully, be appreciated by all. The transparency and visibility would help all banks, their customers and facilitate foreign players to trade confidently. It is hoped that the exchange companies, too, would eventually become part of it by buying the system to watch the real trades and provide visibility to their retail buyers as well.
Copyright Business Recorder, 2024
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