1. Why is demand for the trading of NDFs increasing so fast, where are the regional hotspots located, and what factors are influencing this growth?
Since the early 2000s, Emerging Markets reported a large and rapid growth of NDF offshore trading activity. NDF trading activity frequently exceeds the onshore market in overall traded volumes. Historically, NDF markets developed in response to regulatory restrictions to onshore currency dealing rules. The increase in electronification of the FX trading landscape driven by the request from Institutional Investors to access asset classes in emerging markets drove the growth of over-the-counter products that allowed investors to diversify on otherwise non-accessible marketplaces.
This "pressure to diversify" extensively involved Forex markets too. Asian FX markets represented the first and largest source of exposure, as it currently represents the region, together with South America, that experienced the largest growth in NDFs volumes in the past 15 years. The main driver of Asian NDFs' demand is currently related to the fact that onshore currencies are only partially convertible and mostly not deliverable offshore. Institutional Investors, aware of such restrictions, recur to NDFs as a valid alternative due to limited regulation (OTC), extended trading hours, limited paperwork requirements, good level of liquidity, mitigated credit risk due to net settlement, and no risk of not being able to convert the product.
In terms of regions, on top of Asia, we do see significant growth and interest from our clients towards Latin America (e.g., Brazil, Colombia, Chile, Peru) and a growing interest towards Sub-Saharan Africa. At present the most traded NDFs in the market remain concentrated around Asia with the top traded pairs being the Korean Won (KRW), Indian Rupee (INR) and New Taiwan Dollar (TWD), outside of Asia the Brazilian Real retains a sizeable market share. Before the outbreak of the conflict between Russia and Ukraine, Ruble retained a significant share as well. According to the 2019 BIS Triennial Survey on Forex Markets, NDF trading in INR, TWD, and KRW experienced the fastest growth since 2016.
Amongst the factors we mentioned earlier, what currently underpins NDF market growth are globalization and electronification along with higher currency volatility in emerging markets. A crucial contribution to the increasing diffusion of NDF trading, as correctly pointed out in the 2022 Quarterly Review by BIS, is the migration of FX Trading to less visible venues and a consistent trend towards internationalizing Emerging Market Economy currencies.
2. What are NDFs typically being used for by emerging market investors?
Investors operating in emerging markets products use Non-Deliverable Forwards (NDFs) to hedge against currency risks tied to their investments and business activities in regions where trading local currencies is restricted. NDFs allow them to secure exchange rates for future transactions, which helps stabilize cash flows and protects against currency fluctuations.
Additionally, proprietary trading firms employ NDFs to bet on future movements of restricted currencies without needing to engage in physical (onshore) currency transactions. The existence of an offshore market relative to FX products that might otherwise be not accessible opens up significant opportunities both in terms of risk diversification and hedging and in terms of Sharpe Ratio optimization sources.
3. In what ways has the market's adoption of electronic trading and central clearing in NDFs, which has traditionally not kept pace with other emerging market derivatives, been rapidly catching up, and what developments are expediting this?
A significant driver of this change has been the convergence of Emerging Market Economy currencies towards that of developed economies in one important dimension, that is the participation of "non-residents" in their trading activity. As per the 2022 BIS Quarterly Report, in the early 2000s trading with non-residents accounted for a limited portion of FX activity against Emerging Markets currencies if compared to the portion relative to developed countries where USD or EUR see the predominance of their traded volumes exchange by and between non-residents.
However, by 2022, FX trading activity in Emerging Markets currencies was predominantly with counterparties abroad. This pressure on the internationalization of EME currencies and in particular NDFs facilitated electronic trading and central clearing, quickly catching up with other emerging market derivatives. This shift has been driven by growing demand for greater transparency, regulatory changes aimed at reducing counterparty risk, and technological advances. Central clearing, once limited in this space, is becoming more prevalent as firms look for safer and more efficient ways to trade. Electronic trading platforms are also gaining traction, offering real-time pricing and streamlined execution, which reduces costs and makes the market more accessible.
The above changes implied that Emerging Markets structures in FX are quickly catching up with those of developed countries and increasingly looking like their more developed counterparts in particular in terms of locations where they can be exchanged, products offered, and the counterparty mix participating in their trading activity. Last but not least innovations in post-trade processing are transforming the NDF market into a more efficient and robust ecosystem minimizing settlement risk.
4. What are the main regulatory challenges involved in trading NDFs, and what implications do competing interpretations of NDF regulations have for investors looking to enhance execution outcomes and optimize their trading strategies?
Trading NDFs presents unique regulatory challenges due to inconsistencies in rules across jurisdictions, particularly regarding clearing, margining, and reporting requirements. These differences create complexity for global participants, leading to increased compliance costs and operational burdens. The lack of standardization in pre- and post-trade transparency further fragments liquidity, complicating execution and impacting pricing.
Regulatory uncertainty and varying interpretations of rules can discourage participation, reducing market depth and efficiency. For investors, these challenges need a careful balance between compliance and strategy optimization. Tailored risk management, efficient collateral use, and collaboration with technology providers are critical to navigating these hurdles while maximizing execution outcomes and maintaining a competitive edge.
5. How are leading FX providers responding to surging NDF demand by launching new electronic trading products and services?
Leading FX providers are addressing the growing demand for NDFs by expanding their electronic trading offerings and enhancing client solutions. They are introducing advanced trading platforms that provide greater access to liquidity, improved price transparency, and faster execution. These platforms often feature sophisticated tools, such as algorithmic trading capabilities and analytics, designed to optimize execution and manage risk more effectively.
Providers are also focusing on integrated workflows, enabling seamless pre- and post-trade processing, which reduces operational inefficiencies. To support regulatory compliance, many are embedding reporting and clearing services directly into their platforms. By investing in technology and expanding their product range, FX providers are ensuring that their clients can meet the demands of a rapidly evolving NDF market with greater efficiency and confidence.
6. What work has been done to improve the fragile liquidity environment in which some NDFs operate?
Efforts to improve liquidity in the NDF market have focused on enhancing market infrastructure and fostering greater transparency. The expansion of electronic trading platforms has played a key role, enabling tighter spreads and improved price discovery by aggregating liquidity from a broader set of participants. Central clearing has also gained traction, reducing counterparty risk and encouraging more activity from institutional players.
Additionally, innovations in trade execution, such as algorithmic solutions, have helped optimize order routing and execution efficiency. Regulatory initiatives mandating better reporting and risk management have further supported confidence in the market. Collaboration between trading venues, market participants, and technology providers continues to address fragmentation, making liquidity more resilient and accessible, even in less liquid currency pairs.
7. How much demand is there for NDF algos, what are the challenges of delivering them, and how are these being addressed?
The demand for NDF algorithmic trading has been growing as Institutional investors seek more efficient, cost-effective ways to execute trades in an increasingly complex and fragmented market. NDF algos help reduce market impact, enhance execution speed, and improve pricing accuracy, which is particularly valuable in emerging market currencies with lower liquidity. However, delivering these solutions is challenging due to the fragmented nature of NDF liquidity, varying market conditions, and the complexity of managing execution across multiple platforms.
To address these challenges, firms are developing advanced algorithms that incorporate machine learning and real-time analytics to adapt to market conditions and ensure optimal execution. Enhanced connectivity to liquidity providers and improved risk management systems are also helping to mitigate the challenges of delivering NDF algos.
8. What still needs to be done to facilitate further electronification within the NDF markets, and what direct benefits will this ultimately bring about for trading firms?
To further facilitate electronification in NDF markets, continued investment in infrastructure is needed to enhance liquidity, improve platform inter-operability, and ensure standardized data formats for correct trade execution. Regulatory clarity around electronic trading and central clearing will also play a crucial role in fostering its adoption. Expanding access to real-time data and improving risk management systems will enable more accurate pricing and quicker decision-making.
As electronification deepens, trading firms will benefit from increased efficiency, reduced operational costs, and better risk control. Real-time execution and transparent pricing will also enhance liquidity, leading to tighter spreads and greater market access, ultimately improving profitability and reducing counterparty risks.
9. What factors should influence a firm's choice of NDF provider to partner with?
When selecting an NDF provider, firms should consider several key factors to ensure they choose the right partner. First, providers should offer access to a broad range of currencies and ensure competitive pricing to support efficient execution. The provider's ability to offer reliable, real-time pricing is important for seamless transactions. Additional considerations should include technological infrastructure, speed of execution, and post-trade support services.
10. What does the future hold for the growth of NDFs, and what developments with regulations, technology, and market dynamics could unleash their potential even further?
The future growth of NDFs looks promising as regulatory frameworks continue to evolve, technology advances, and market dynamics shift. As mentioned earlier the process of internationalization of EME currencies observed since the early 2000s to today has been significant. However, there is still large room for growth, and this is observable in the large gap still existing between Emerging Markets currencies trading activity and underlying economic activity (GDP). Currently, the volume of FX trading in several Emerging Markets currencies remains low if benchmarked against its own country's GDP. If compared to developed markets, where FX Spot average daily volumes in USD terms represent several multiples of daily GDP, it implies for EM markets the presence of significant room for expansion.
The internationalization of EM currencies in the past 20 years went hand in hand with an increase in the share of trading with a diverse range of customer categories, such as brokers, institutional investors, hedge funds, and prop firms. The access to these markets to pure offshore, such as external dealers and brokers, was a driver for faster innovation adoption that helped to deepen market liquidity and access. Institutional customers tend to trade more heavily in derivatives (NDFs) than FX Spot when dealing with EM markets, referring again to the 2022 BIS Quarterly Review the share of financial (offshore) customers trading EM pairs went from 30% of overall trading in April 2007 to around 50% in April 2022.
Taking into consideration the same time frame, considering the median EM currency, derivatives trading increased from 61% of total FX turnover in April 2007 to over 73% in April 2022. If we then look into which are the derivatives that are mostly traded in FX comparing developed countries against emerging markets we will find that regions with capital controls have a predominance of trading in forwards and especially in NDFs whilst developed countries see higher volumes in FX Swaps.
According to statistically observable data, the increase in trading of emerging markets economies' currencies, in particular for foreign Institutional investors, in the past 10 years was a rise in portfolio flows predominantly invested in bonds and other local currency-denominated securities that brought to a rise in the need to actively manage exposure in EM pairs.
Consequently, the larger the stock of outstanding governmental or corporate depth, the larger the demand for an available and liquid hedge to cover the FX exposure of the locally denominated asset class against USD.
To conclude, AlpFin thinks that the main development in EM Forex markets in the coming years will evolve around 4 main areas:
- Increase access to Foreign Institutional Investors in the market.
- Increase adoption of electronification impacting regions outside of Asia.
- Increase in overall trading activity of NDFs and overall increase of FX volumes compared to local GDP.
- Evolution of the fragmentation of FX Emerging Markets due to the relationship between onshore and offshore driven by the existence of capital controls.
If you wish to further discuss this topics with our team, feel free to reach out to efxsales@alpfin.com.

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