One of the most significant factors driving renewed momentum for EM markets is greater ease of access, aided by growing credit intermediation as institutions channel capital into these markets through more sophisticated lending and financing structures.
That is the view of Vibhanshu Bahuguna, senior director at MEX Exchange, who also refers to increasingly interconnected trade and capital flows creating new opportunities for institutional participation across these markets.
“EM markets tend to be highly regulated, restricted, opaque and relationship-driven, shaped in part by the role of credit intermediation in facilitating access and liquidity,” he says. “Successfully navigating EM therefore requires a long-term, nuanced approach, one built on local partnerships, regulatory clarity and the localisation of products.”
As technology, liquidity and the right operational frameworks continue to mature, he expects to see spread compression that brings EM markets closer in line with G10 levels.
“As credit access increases and expands across the ecosystem, spreads naturally narrow and that premium erodes, particularly as local players are able to service global counterparties in pairs where they hold a natural advantage,” explains Bahuguna.
“Successfully navigating EMs requires a long-term, nuanced approach, one built on local partnerships, regulatory clarity and the localisation of products.”
Vibhanshu Bahuguna
However, he adds that some premium likely still exists in other products such as forwards, swaps and options, with the premium remaining most pronounced in credit-intensive instruments such as forwards and swaps, given their greater reliance on bilateral credit lines. These products are next in line for automation as part of the broader e-FX strategy being adopted by regional banks.
“Every market has its own unique characteristics, regulations and workflows, making it imperative to combine strong local understanding with technology that is properly customised to operate within each local framework,” says Bahuguna. “At the same time, it is equally important to bring global best practices into these markets and benchmark them locally to identify areas for improvement.”
He notes that institutional participation has driven tremendous volume growth in the NDF space. As average daily volumes in NDF markets have grown, NDFs have – in certain instances – become something of a precursor to the spot market itself, with NDF trading occurring in a time zone ahead of the corresponding onshore market.
“Beyond the operational and technological evolution, this growing institutional participation also reflects a broader shift: these instruments are increasingly serving as a natural hedging vehicle for global portfolios, providing investors with efficient tools to manage EM currency exposure.”
Average daily volumes in NDF markets have grown
Flows follow liquidity
The strongest institutional flows are concentrated in the more liquid and electronically accessible EM complexes, particularly Asian currencies such as CNH, KRW, INR and TWD, where hedging demand, international investment and market structure reform are accelerating participation observes Roger Lee, global head of sales at SGX FX.
“As FX liquidity becomes more fragmented across bank streams, ECNs, exchanges and internalisation pools, the biggest challenge is finding intelligent ways to access it,” he adds. “Firms are moving from relying on a single venue to adopting a hybrid execution approach. They increasingly recognise the benefits of venue specialisation, while exchanges are going beyond simply offering liquidity and helping to set prices, improve transparency and make clearing more efficient.”
Lee notes that the EM liquidity premium is compressing most clearly in the more electronic and better-covered currency pairs, while remaining meaningful in frontier markets or currencies subject to local access and settlement constraints.
“As more institutions enter EM FX, there has been a clear shift towards stronger demand for sophisticated risk management tools, driven by heightened market uncertainty, geopolitical developments and shifting capital flows,” he says. “With the growing maturity of market participants, asset managers, hedge funds and corporates are increasingly using NDFs, swaps and options not only to hedge risk but also to optimise portfolios and manage funding, liquidity and cross-border exposures.”
Lee observes that the edge in FX execution has shifted from pure speed to intelligent, data-driven decision making.
“Institutions are increasingly focused on smart order routing, adaptive execution strategies and real-time analytics,” he says. “This enables them to select the optimal liquidity source based on factors such as fill probability, market impact and liquidity quality, not just price or speed. Advances in analytics and AI mean desks can continuously evaluate venue performance, liquidity behaviour and execution outcomes in real time.”
“As FX liquidity becomes more fragmented across bank streams, ECNs, exchanges and internalisation pools, the biggest challenge is finding intelligent ways to access it.”
Roger Lee
Lee agrees that local market expertise is critically important in emerging market FX because technology alone does not remove the complexity of trading across markets with very different rules, liquidity profiles and operating conventions.
“A provider may have strong execution technology but without a deep understanding of local regulation and market structure, that technology can route clients into liquidity that looks attractive on screen but is not necessarily the best or most practical outcome once settlement, credit, documentation and market-access constraints are considered,” he adds.
Dynamic ‘emerging’ definition
Meanwhile John Stead, VP strategy & marketing at smartTrade Technologies observes that there is no clean cut-off where a market stops being ‘emerging’, referring to it as a spectrum that sophistication sits along.
“I can think of clients in so-called emerging countries running highly sophisticated rule frameworks, managing which currencies may trade single-sided or two-sided by client and jurisdiction,” he says. “That sophistication demands an equally sophisticated vendor counterparty.”
On the market side, global LPs have pushed into local currencies and regional banks now distribute their onshore franchises electronically to a global audience, which itself deepens the market.
“In G10, analytics refine execution; in emerging markets they enable it. Pre-trade analytics answer the questions our clients actually ask while post-trade TCA provides the audit trail best execution obligations demand.”
John Stead
“On the technology side, we see our clients close the gap with three tools: volume-weighted synthetic pricing for a defensible mid where no public one exists; automated hedging rules that lay off risk in the instrument that actually trades (the 1-month NDF, not a notional spot); and deviation filters for the off-market prints thin markets throw off under stress,” says Stead.
The catch is that in thin markets the penalty for unsophisticated execution is far larger than in G10, so the return on execution technology is correspondingly higher.
Stead observes that neither corporates nor institutions travel unhedged, so participation and hedging instruments have grown together.
“NDFs are the headline: once a niche workaround, now a cornerstone of risk management, with volumes at record levels and the carry flows of the past year have travelled through exactly these instruments, with dealers reporting positions expressed overwhelmingly through NDFs and FX swaps, options favoured by the leveraged accounts,” he adds.
There is a quieter driver too: payments, largely corporate flow. Every cross-border payment in an emerging corridor carries an embedded FX trade and Stead explains that it doesn’t stop at fiat.
As for the role of market data, analytics and transaction cost analysis in improving execution quality across emerging markets, he says data is what makes an illiquid market investable.
“In G10, analytics refine execution; in emerging markets they enable it. Pre-trade analytics answer the questions our clients actually ask (what this trade should cost, at this size, at this hour and which providers perform) while post-trade TCA provides the audit trail best execution obligations demand.” The fastest price and the deepest liquidity increasingly live in different places, so analytics that distinguish where the price moved first from where the size can actually clear are becoming the difference between good and expensive execution.
Rates boost returns
Interest in EM FX has returned for reasons that are largely structural rather than sentimental, suggests Gerard Melia, global head of FX sales at StoneX. Yield and carry differentials have re-opened as developed market rates have come down and emerging market rates are once again offering real returns rather than compensation for risk alone.
“Two further drivers are less discussed but arguably more durable,” he says. “Trade corridors and supply chains have been reconfiguring for several years now and that produces genuine underlying currency flow rather than purely financial positioning. In addition, a significant proportion of emerging market currencies are commodity-linked, which means the interest in those currencies moves with commodity cycles rather than independently of them.”
Melia explains that while the EM liquidity premium is frequently characterised as a markup applied because a market is difficult, it is more accurately understood as the price of a set of real costs that someone in the chain is carrying.
“Those costs are identifiable,” he says. “Facing emerging market risk consumes credit and balance sheet in a way G10 exposure does not. The position generally has to be warehoused, because it cannot be instantly offset in a market without depth. Participation requires standing operational and settlement infrastructure; correspondent relationships, local cut-offs, documentation – which is a fixed cost of being in the market rather than a per-trade cost.”
“Facing emerging market risk consumes credit and balance sheet in a way G10 exposure does not. The position generally has to be warehoused, because it cannot be instantly offset in a market without depth.”
Gerard Melia
In addition, assembling a usable price from fragmented sources is work and the client is buying certainty of execution.
“An important part of the current picture is that non-bank providers have taken up a role that banks have stepped back from,” says Melia. “As bank appetite for extending emerging market credit to mid-tier institutions has narrowed, providers with balance sheet strength outside the traditional banking model have filled that space.”
He also describes local market expertise as essential and says the areas where it earns its keep are the everyday mechanics of getting business done.
“Technology determines the reach and the consistency of what can be delivered; expertise determines whether what is delivered is correct. In emerging markets particularly, clients are buying access to judgement, not just access to infrastructure.”
As institutional participation has deepened, Melia observes that clients increasingly approach with an outcome they need to achieve rather than a product they wish to transact.
“The outcome that dominates is the protection of a budget or planning rate,” he says. “Our institutional and corporate clients operating with emerging market exposure are, in the main, not attempting to optimise their way to the best available level – they are attempting to secure certainty over a defined horizon so that commercial and financial planning holds.”
Institutions seek carry
According to Nicholas Serff, Chief Dealer at Exinity, there are two main reasons why emerging markets are attracting renewed institutional interest.
“First, we are seeing much more opportunity from macro volatility,” he says. “US policy uncertainty, shifting Fed expectations and the AI investment theme are creating significant moves across EM FX and rates, giving institutional investors more opportunities to put risk on. Korea is a good example, where USD/KRW has become a key expression of both AI-related capital flows and broader USD views. Second, when markets are quieter, institutions are still drawn to EM carry. With many G10 markets lacking clear direction, investors continue to look at higher yielding currencies where they can earn attractive carry while waiting for the next macro catalyst.”
That has supported flows into markets such as Mexico, while parts of Asia – particularly Korea – have also seen increased interest. Overall, LatAm and Asia appear to be attracting the strongest institutional inflows at the moment.
“EM FX markets are more fragmented, less transparent and often subject to capital controls, local regulations and onshore/offshore market dynamics,” explains Serff. “Liquidity can vary significantly by time zone and market conditions, making execution and market access more challenging than in G10 currencies.”
“Liquidity can vary significantly by time zone and market conditions, making execution and market access more challenging than in G10 currencies.”
Nicholas Serff
He acknowledges that there is still an EM ‘liquidity premium’, especially in more localised markets with less accessibility but also refers to growing demand and improved electronic access for EM over the past 12 months.
“However, liquidity remains highly event-driven and can change quickly with shifts in USD positioning,” adds Serff. “I believe this has led to an increase in more sophisticated execution strategies.”
In this context, local market expertise is critical because technology alone cannot replicate access to domestic liquidity, regulatory insight and local market relationships. The strongest EMFX providers combine sophisticated electronic execution with deep understanding of market microstructure and liquidity behaviour.
“One of the most important developments in terms of electronic FX trading platform and execution technology has to be access to liquidity and connectivity,” says Serff. “Trading platforms and execution technology venues now have the ability to aggregate pricing from multiple liquidity venues, giving the market a broader view of available liquidity rather than relying on single counterparties.”
The evolution of FIX API connectivity has also made it more accessible for international market participants to access emerging markets electronically.
“We have seen growing demand in NDF and options requests over the past year, with institutions looking for more efficient ways to hedge EM risk,” says Serff. “We have seen this across certain markets where options based strategies have become a preferred way to gain exposure around major macro events.”
Data increases clarity
When asked about the role market data, analytics and transaction cost analysis play in improving execution quality across emerging markets, Serff notes that access to more granular market data allows participants to build a clearer picture of where liquidity is available, how deep it is and how it behaves under different market conditions.
“This can help traders make more informed decisions around when, where and how to execute, rather than assessing execution quality purely on the quoted spread. Ultimately, better data allows market participants to move from simply accessing liquidity to understanding its quality.”
When selecting an emerging market FX provider, Serff suggests investors should prioritise providers with deep local liquidity access, strong relationships with banks and proven execution quality across market cycles. “Equally important are robust technology, regulatory expertise and a strong balance sheet allowing the ability to maintain consistent liquidity during periods of market stress,” he adds.
For a long period, electronic connectivity effectively stopped at the G10 boundary and everything beyond it was handled by a different process, notes Melia.
“That distinction has largely gone. Emerging market currencies now sit in the same workflow as everything else – one connection, one credit relationship, no separate manual process bolted on for the emerging market leg of an order – and for institutions running programmatic execution, that removes a genuine operational discontinuity rather than simply improving convenience.”
Automated pricing has also reached currencies that were previously request-for-quote only, which has changed both the frequency and the size distribution of trading in those pairs – although Melia acknowledges that longer-dated business and anything with structure to it remains a conversation rather than a click.
He refers to the importance of counterparty strength and breadth of coverage as well as single-relationship simplicity, consistency of pricing in stressed conditions and operational and settlement reliability when choosing a provider.
“Technology has widened access to emerging markets considerably and it has removed a great deal of friction that used to make participation impractical,” says Melia. “What it has not done is remove the need to choose the right partner.”
Stead is keen to stress that emerging markets weren’t in the stone age waiting for electronification. Many electronified years ago, often on homegrown systems or capable local vendors that served them perfectly well up to a point.
“The trend we see now is banks reaching that point,” he says. “As demand and sophistication grows, the limits of those platforms start to show and banks are moving to internationally recognised vendors with the global experience those markets now need.”
Stead suggests institutional investors should focus on evidence when selecting an emerging market FX provider and that the most reliable attribute is production deployments in the regions the client cares about.
“After that, key features include NDFs and NDSs as native instruments in one workflow; dual deliverability per counterparty; local conventions encoded as configuration, not rebuilt as a services project; an integrated stack covering trading, payments and curves from one vendor; and AI that advises rather than summarises,” he says.
Clients crave consistency
The attribute he weighs most heavily is adaptability on the basis that clients want a vendor that is solid for where they are now and for where they will be in five years, as currencies become more liquid, markets open up and regulatory environments change.
The future of FX markets is no longer defined by individual products but by connected and interoperable ecosystems that enable clients to access liquidity, intelligence and execution through a single framework, suggests Lee.
“Market participants are seeking to navigate fragmentation and increasingly want solutions that combine execution, data, analytics and workflow automation,” he says. “Trading platforms are building infrastructure to support both traditional financial markets and emerging digital ecosystems.”
He notes that while the strength of proprietary data is quickly becoming the key competitive edge in institutional FX, its value depends on effective real-time capture, connection and action.
“While balance sheet strength and access to liquidity used to be the main differentiators, those advantages are now more common,” says Lee. “The firms that succeed are those that can rapidly turn raw data into actionable insights, consistently winning flow and delivering better client outcomes.”
What sets top institutions apart is their ability to use client flow data, liquidity behaviour and execution analytics to optimise pricing, routing and risk management. This involves understanding client segmentation, flow toxicity, LP performance and venue-specific dynamics, all of which impact execution quality and profitability.
“In an environment defined by fragmentation and electronification, firms that can turn raw data into actionable insights consistently secure flow and deliver superior client results,” says Lee, adding that the real shift isn’t merely owning data but operationalising it at scale.
Platforms facilitate this process by integrating real-time analytics, AI-powered insights and feedback mechanisms directly into trading workflows. This enables institutions to adapt pricing, hedge ratios, routing and internalisation strategies on the fly, based on live intelligence rather than fixed rules.
“For this reason, institutional investors should prioritise providers that combine execution access, liquidity depth, data transparency, analytics, venue intelligence and demonstrable EM market expertise, rather than selecting on technology or headline pricing alone,” suggests Lee.
Changing trading workflow
EM trading was traditionally conducted via voice, matched directly between brokers. This was, in many ways, an effective model, as it preserved a level of pre-trade anonymity between counterparties and relied on a purely relationship-based workflow.
Over time, this evolved into a chat-based workflow, which introduced a degree of automation, offering some level of audit trail and enabling trade tickets to be printed or saved electronically post-trade, explains Bahuguna.
“Both models, however, faced inherent limitations when it came to scale. As EM pair volumes grew, so did transaction counts and voice and chat-based workflows are, by nature, resource-intensive and difficult to scale efficiently. This challenge was addressed by CLOB-style matching engines, which automated the entire trade lifecycle. Yet the CLOB model primarily serves inter-bank market participants, leaving non-bank entities still reliant on traditional trading methods.”
This dynamic shifted with the emergence of electronic trading platforms, which gave clients access to bilateral aggregators, white label technology and pricing engines.
When evaluating a potential EM FX partner, Bahuguna suggests institutional investors carefully assess both the risks and opportunities involved, alongside the broader regulatory regime and its potential trajectory, taking a view that spans both the near and long term.
“Equally important is the partner’s ability to provide credit intermediation, as this is often the key that unlocks access to a broad spectrum of participants across these markets,” he adds. “A partner who can facilitate credit access effectively is one who can meaningfully broaden an institution’s reach and execution capability across the EM landscape.”
