A Closer Look At: Bespoke FXPB Systems

Marcus Butt, global head of FX prime services and futures at NatWest Markets, talks about how the bank is developing its FX Prime Brokerage offering in response to changing client needs.

Profit & Loss: So what are you doing on the FXPB side of your e-FX platform that you think differentiates your offering right now?

Marcus Butt: What we’re doing on the platform that is unique is really a reflection of what we’re doing in the business. Part of this is that we’ve introduced a number of new prime brokerage models to accommodate the diversification of our client base.

Historically we primarily dealt with hedge funds and banks, but over the past couple of years we’ve expanded into many different intermediated models. This has resulted in a prime brokerage arrangement that looks like a prime broker talking to several participants all at the same time who are effectively all doing the same transaction, but they have slightly different roles within that transaction execution.

P&L: Can you give an example of what you mean?

MB: So you could have an intermediary between the client and the end liquidity provider, or that broker could potentially use a platform and that platform could be PB- ed. And then that platform could be getting its liquidity from a bank or from a non- traditional liquidity provider who was also PB-ed. So you see how these things can string together?

One ultimate transaction can have many different participants in it before you end up with someone who’s clearing their own trade.

We’ve specialised in that area to support those groups of people so that they could access as many different client types as they want. And what that means from an e- platform perspective is that the systems have to recognise in what capacity each user is operating.

If you’re acting in a relatively straightforward capacity as a traditional prime brokerage client, then the functionality that we’ve built for that person is different compared to someone who is sitting in the middle, doing two simultaneous trades and therefore has a very different set of needs from a trading capability perspective and a post-trade monitoring perspective.

In order to support this we had to build our system so that when a client logs on, it knows what capacity they’re operating in, because we’ve configured it to that firm, whether it’s a client, an intermediary, or an end-user. In some instances each participant type sees the same screen but other screens are tuned to the individual’s perspective. For example, the matching screens look totally different for each because it’s been designed to reflect their different needs.

P&L: But are there instances where participants act in multiple capacities?

MB: Yes. Then they could have both screens open at the same time because the systems have separate windows. So an end- client running a trading platform – which should always be equal and offsetting – might be acting as the intermediary in one leg and a classic prime broker in the other. They could have two matching screens showing different behaviours, and have two different sets of flows going through each, because we have to separate them as they’re covered under separate legal agreements. So from a systems point of view they have very different functional requirements, but because our system identifies who is logging in we can provide all of these requirements even if the firm is acting in multiple capacities.

P&L: A lot of FXPBs seem to be targeting asset managers by offering operational relief from having to post margin against numerous different counterparties in the wake of new regulations. What are you seeing ont he asset management side?

MB: That is definitely something that asset managers are interested in. However, because we’ve had central clearing for certain products, their collateral management operations teams have, in many instances, developed efficient marging solutions.

There are still operational efficiencies to be had there though, and in addition to that one very common theme we’re seeing is that a wide range of clients are trying to manage their balance sheets or gross notionals as well. So far, the compression services brought to market have been focused on inter-bank activity. There’s quite a high degree of complexity to run a compression service for clients because each of their risk requirements are different. So it becomes a very bespoke service.

P&L: And can you talk to what you’re doing in terms of white labeling your FXPB platform?

MB: New regulations are requiring clients to request multiple price sources ahead of trading, and what we’re doing is helping our bank clients to be autonomous by effectively empowering them to provide a prime service to their own clients. In essence, an intermediate bank using our white labeled product is able to let its underlying clients go out to the market in that bank’s name – effectively like a private prime-of-prime solution.

The complexity here comes in the affirmation, where we have system capabilities for the end-client to affirm their trade.

Once affirmed and matched, we have a two-tiered credit model, because we have our credit risk versus the client bank, and then the client bank has credit risk versus their client.

We’re not trying to disintermediate the client bank here; we’re just enabling them to provide additional services to their customers.

Galen Stops

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