A range of instruments and platforms already exists to manage FX risk and expand access to LCY finance. Their value lies in addressing different constraints across the system. TCX helps fill the offshore hedging and risk-sharing gap where onshore markets are absent or too shallow. Delta, still at concept stage, points to a possible onshore model for pooling treasury capacity, funding and hedging operations across MDBs and DFIs. Frontclear addresses a different constraint: the money-market infrastructure that allows local institutions to manage liquidity, collateral and counterparty risk more effectively. The challenge is not to choose between these approaches, but to scale each where relevant and strengthen the links between them.
This has implications for how concessional and first-loss capital should be used. Rather than providing permanent subsidy, it should address specific market failures that limit LCY finance at different points in the ecosystem. In offshore hedging markets, the EU Market Creation Facility (EUMCF), leverages concessional capital to enable TCX to offer hedging at discounted rates in high risk markets, addressing the problem that borrowers who need protection are often those least able to afford it. In onshore markets, concessional support can help build the treasury capacity and market infrastructure needed to intermediate LCY finance more sustainably over time.
Seen in this context, Delta illustrates the promise of a more integrated onshore model. By centralising treasury capacity, liquidity pooling and market operations across participating MDBs and DFIs, it seeks to reduce fragmentation in LCY lending while strengthening local market functioning. Its value would lie not only in supporting hedging and funding operations, but also in accelerating broader reforms to MDB treasury practices and onshore market engagement. Delivering this will depend on careful partnership with governments, regulators and local market participants, particularly where domestic liquidity is scarce and MDB or DFI issuance could affect sovereign funding conditions.
The interaction between offshore and onshore approaches is therefore central. TCX can operate in frontier markets where domestic market depth is insufficient, while Delta-type models aim to deepen local markets and intermediate risk onshore. These approaches are complementary rather than competing, and in some cases may operate within the same transaction structure. Improvements in local market liquidity, participation and pricing reduce the cost of managing FX risk across the system and create better conditions for both offshore hedging and onshore intermediation.
Deliverable FX spot markets are also part of this transition, particularly where local currency can be accessed and settled through regulated banking channels. Providers such as Crown Agents Bank can help connect international capital with local FX liquidity and payments infrastructure, complementing hedging platforms and onshore market-development efforts.
Frontclear and similar models help address the market-infrastructure constraint that underpins this transition. By reducing counterparty, settlement and credit risks, they make repo, swaps and other collateralised transactions more feasible where weak netting frameworks and bilateral limits prevent liquidity from circulating through the banking system. This matters because local banks cannot fund, refinance or manage LCY risk effectively without functioning money markets.
Indexed structures can also play a useful intermediate role where full LCY lending is not yet available. Inflation-indexed and synthetic LCY instruments can reduce currency mismatch while preserving access to international funding, particularly in markets where domestic-currency funding and hedging remain limited.
Alongside product innovation, co-financing structures will be important for mobilising international investors that may have appetite for LCY assets but lack an efficient route to access them at scale. A proposed ILX Local Currency B-Loan strategy is one such example, exploring whether MDB and DFI-originated LCY loan participations could be aggregated into a diversified fund for institutional investors, potentially alongside LCY bonds and medium-term notes. The proposal responds to emerging interest among European institutional investors in gaining exposure to LCY returns, while leveraging MDB and DFI origination platforms to create a more investable and diversified LCY asset class. Donor backing for the feasibility and design phase could help establish whether the model can offer an investable risk-return profile and, if successful, support its launch and subsequent scale-up.
The appropriate balance between these tools will vary by country context. In frontier markets, offshore hedging and donor-backed risk absorption may remain essential. In more developed markets, the priority may be to deepen onshore issuance, repo markets, swaps and domestic institutional investor participation. No single model will work across all markets, but scaling proven mechanisms and connecting them more deliberately offers a practical route to managing FX risk while building deeper LCY finance over time.
Two agreements concluded during the dialogue illustrate that connection directly. Under a branded Unlocking Local Currency Initiative, TCX signed Letters of Intent with Crown Agents Bank and with Frontclear to develop deliverable local currency transaction structures, combining TCX’s market-making and risk absorption in illiquid currencies with Crown Agents Bank’s capacity to source and move liquidity in and out of frontier markets, and Frontclear’s ability to unlock domestic interbank liquidity through credit enhancement. Both are preliminary, with pilots envisaged rather than committed. Their relevance is structural rather than transactional: offshore and onshore capability are not sequential stages of a single development path, but functions that can be combined within a single transaction.
Specific propositions that attracted support included:
- Scale TCX while preserving additionality. Additional capital for TCX should preserve its additionality across currencies, tenors and sectors, while ensuring it can continue to hedge in frontier and low-income markets where commercial or onshore solutions are least available, and develop its ability to distribute currency risk to private investors and recycle capacity for new transactions.
- Advance the EBRD/AIIB Delta proposal towards piloting. The international community should support Delta’s development as a system-building model for more integrated MDB and DFI treasury collaboration on onshore LCY finance and domestic market development; supporting ongoing efforts to define potential pilot markets, participating institutions, governance arrangements and the relationship with existing treasury operations.
- Target guarantees at liquidity blockages. Donors and shareholders should support guarantees and related risk-sharing tools, such as those provided by Frontclear, where counterparty, collateral or legal risks prevent interbank liquidity from circulating. These interventions should be linked to specific market-development objectives, including stronger repo activity, better collateral use, improved short-term benchmarks and deeper conditions for LCY swaps and lending.
- Build local currency pathways for institutional capital. Donors and shareholders should support the development of platforms that connect MDB and DFI origination capabilities with long-term institutional investors. The long-term challenge is not simply originating more LCY loans, but creating investable structures capable of attracting mainstream institutional capital. By aggregating diversified LCY exposures into investable vehicles, these models could help establish LCY lending as a scalable asset class and unlock a far larger pool of capital than MDBs and DFIs can provide on their own.