2020 October-November Analysis

New FX market reforms, Bloomberg trading platform seek to bolster lari liquidity

Georgia’s National Bank is taking an adventurous step in response to encouragement from international financial institutions (IFIs) to develop the local financial markets and increase international interest in the lari.

Signing up as client of international financial and media services provider Bloomberg’s Bmatch platform, the bank hopes to strengthen major reforms coming into force on October 1 to implement the FX Global Code – principles of good practice followed in markets world-wide to promote effective functioning of the wholesale foreign exchange market and to increase liquidity and transparency.

At a time when the lari is under pressure, the NBG believes that these moves will give confidence in Georgian finance markets and widen international as well as domestic participation by making them more competitive, and in doing so comply with IFI advice.

Action to “further develop the local capital market” was called for by International Monetary Fund managing director Christine Lagarde on her visit last year; the World Bank’s website states on its Georgia page that it is working to “foster financial diversification and build up foundations for more competitive, transparent…markets”; for the European Bank for Reconstruction and Development a major focus is “developing local currency and capital markets to enable the private sector to have better access to finance.”

The NBG has been working for some months with support from the United States Agency for International Development (USAID) to ensure Georgia’s foreign exchange market users understand the FX Global Code. USAID brought in international experts to help in training. The Bmatch platform has been trialled since March and is being actively used by 15 banks, four microfinance organizations and one large corporation in Georgia, with about $200 million already having been traded.

Guidance from NBG on the new procedures is that the trading terminal will be used not only by commercial banks, microfinance organisations and brokerage companies, but also by non-resident and resident investment funds and companies engaged in import-export.

This means that entities who want to buy and sell currency should find it easier to connect and to deal at more favorable rates. With the potential to attract hundreds of participants the platform, it is hoped, will increase liquidity and reduce spreads (the difference between selling and buying bids).

Companies will be able to trade on the platform independently, without the mediation of banks. This last point should be attractive to companies with large foreign exchange turnovers, and for whom the monthly cost of signing onto the terminal would be commercially justified.

The Bmatch platform will allow users to deal by indicating the amount of the currency they wish to trade and their target exchange rate.

When buying and selling rates coincide, the system automatically completes the transaction anonymously. Only once the deal is done will the parties to the trade be revealed.

So far there have been mixed responses to these reforms, but among those pro is Levan Surguladze, chairman of the Supervisory Board of the Caucasus Business Group, who has had wide experience of international capital markets when running leading US and European-based investment funds.

He believes the platform will promote more effective pricing, thanks to the increased liquidity.

“The foreign exchange market will become more efficient, which means that prices will be more properly regulated. The information that is available in the market will be more quickly and fully reflected in the relevant prices. Consequently, this is a step forward. In addition, the Bmatch platform is an additional comfort for investors”, said Surguladze.

Also, in favor is Levan Vepkhvadze, executive director of the Business Association of Georgia, who said: “After the publication of the Code for the FX market, the National Bank of Georgia started working to introduce it on the Georgian market.

As a result, procedural rules for foreign exchange market participants have been developed, which aim to increase transparency and competition and establish fair, equal conditions for market participants and better protect the interests of their clients.”

However, at Thales Investment Group, Vasil Revishvili is skeptical how much these moves will help the lari. “Sure, this may increase the number of players on the exchange. But this will not affect the GEL exchange rate, nor will it have the effect of stabilizing it, because demand and supply will not change. What is positive is that there will be less risk of potential manipulations on the market”, financier Revishvili says.

More doubt is cast by financial analyst Lia Eliava, who believes the platform will have an unfavorable impact on the national currency: “This is not a fundamental change. It will simply make it easier for the National Bank to keep track of how commercial banks operate in the foreign exchange market. As for the involvement of other foreign companies in trade, I think it will further increase the volatility of our national currency,” says Eliava.

However, the NBG says it will monitor potential risks, and will periodically make transactions on the platform if needed. Such transactions, the NBG says, are particularly effective when there is reduced liquidity in the market. In addition, the National Bank has set trading rules for Bmatch participants and will monitor their compliance.

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