Welcome to 2020 and may I wish you all a healthy and prosperous new year – if we’re looking in purely market terms I suppose that means some volatility.

There were a few things that caught my eye over the holiday period, all of which I will, hopefully, get to in the next week, but let’s kick off with the totally irrelevant result of one of our Irrational awards and the news that these beauties won the 2019 P&L Socks contest, beating out the “on-message” P&L socks; my thanks to those of you who voted.

More seriously, those of you who were not obsessed by the ankle wear of speakers at our events last year will have noticed that in mid-December 360T officially launched its FX swaps platform. It is hard to escape the notion that the firm has invested a lot in this venture and not just money either – with something around 60 yards a day, or three-quarters, of the platform’s volume being in swaps this is a big deal if the platform is to deliver the growth Deutsche Boerse, its parent company, obviously desires.

My thoughts on this are nothing new to regular readers, the FX swaps market is going to embrace greater automation at some stage and the provider that can grab the lion’s share of the growth will be in a very strong position. There is also the fact that it’s hard to see tremendous growth in spot FX for many platforms given the persistent low volatility and the fact that when vol does return, traders typically turn to the primary venues.

FX swaps is a very important business for 360T – and in fact always has been. A look back at the firm’s ADV allows a few assumptions (which I know are always dangerous, but when has that ever stopped me?) that reinforce that. Around mid-2018 when it acquired Gain GTX to establish a spot ECN, the latter was handling around EUR 15-17 yards a day. In July 2018, the earliest date that 360T spot data is available, it reported EUR 22 yards a day, thus, the inference is that prior to that, the 360T platform was very much in the single digits as far as spot volumes are concerned (and it was handling overall FX volume in the low EUR 60 yards a day area prior to the GTX purchase).

Since mid-2018, 360T’s spot volumes have hovered in a range slightly wider than the EUR 20-23 yard area, thus they have remained broadly stable. Overall volumes, however, have gone from just over EUR 71 billion in July 2018 to just over EUR 81 billion in November 2019 (final December data is not yet released), therefore the growth – not unlike the BIS turnover survey – is in the non-spot product groups.

As with all volume data, there is the big question of what tenors the volume is being traded in, if for no other reason than the brokerage charged is significantly different, and as is the case with Refinitiv’s much larger offering (in ADV terms) the sense is a lot of it is in the short dates, although it is interesting that 360T, as it is with Refinitiv, often shows a small spike on the quarters, suggesting there may be some decent three-month hedging going on.

So the big question is, will this play by Deutsche Boerse succeed? The history of the FX industry is littered with the debris of firms that tried to challenge the status quo and disrupt the incumbents in a particular product set, but this could be different in that not only is the firm backing it large enough to withstand a prolonged low-key start, but there does seem to be a bit of buzz around the industry about this initiative.

The mid-match concept is clearly popular – I have stated in this column before that the one big advantage the voice brokers have is that they largely enable the big dealers to trade at mid, so it meets that need – and there is also the question of the potential of clearing, another subject that is rapidly moving closer to the heart of managers and traders in the FX swaps space.

I also found it interesting that the first trade was executed between two banks and did not involve a customer for in spite of the incessant chatter around everything being about the buy side, this is one area where I think the growth potential lies elsewhere – i.e. amongst the dealers. Generally speaking, and again I have said this before, customers seem quite happy with how they execute their FX swaps business and that they very much adhere to the adage that “if it ain’t broke, don’t fix it”.

The dealers on the other hand are facing an increasing regulatory burden, increasing competition and while there is a degree of interest rate volatility, it is nothing like it was, so P&L opportunities are reduced. In these circumstances the instinct is always to cut costs where possible and voice brokerage bills can be quite significant, let alone the costs of manually processing so many trades.

The opportunity set in this product very much lies with the banks and not with the customers; of the $3.2 trillion traded daily in FX swaps, $2.5 trillion is with banks – that is where the real growth potential lies, the chance to become the primary venue for FX swaps

The challenge for 360T will be competition from other platforms – although it will be interesting to see how the early mover advantage plays out. CME’s FX Link is continuing its steady growth but has not yet broken out, while my sources say that the EBS project to build an FX swaps franchise has hit a few obstacles and is still some way off. Refinitiv’s ADV is so far in front of the others, averaging around the $340 billion mark for the first 11 months of 2019, that the impact may not be noticed, although the firm cannot afford to divert its attention away from this latest challenge as LSE Group completes its takeover.

There are plenty of FX swaps initiatives out there to add to the competition but I am not sure they will be able to, mainly because, as I noted earlier, I believe the opportunity set very much lies in the dealing fraternity rather than the customers. This is where things get interesting, because Refinitiv and EBS (and Bloomberg of course) are deeply embedded in the banking industry, whereby most of the others have a heavier buy side footprint and as such their efforts are, according to various sources, more targeted at attracting buy side flow. 360T is clearly seeking to change this, at least as far as the swaps franchise is concerned – of course it will still promote its buy side franchise, but for me the real growth comes in the bank and not the customer segment when it comes to FX swaps and as such, this is a different initiative to many others out there.

As far as the customers are concerned, they will hedge as they always have done and as such, while the numbers may go up and down with interest rate volatility, this segment is unlikely to be a source of serious, sustained, growth – when it comes to FX swaps, I am not sure that what we would term the traditional buy side offers a great deal of value (at least in growth terms). To put that into numbers, consider this: we all know the $3.2 trillion per day of FX swaps number established by the Bank for International Settlements (BIS) in its latest FX turnover survey, but how many people know that swaps turnover with reporting dealers and other banks accounts for $2.5 trillion of that? Throw in the non-bank firms that are champing at the bit to get into this product set in a big way and you are left with just 10% of FX swaps volume being transacted by customers. $300 billion is a serious number of course, but it is dwarfed in the context of the overall market. I am not sure how much opportunity there is to seriously grow automation levels from that $300 billion, especially as so much of it is likely to be rolls – there is a tremendous opportunity in the banking segment.

So I have no doubt that the growth opportunity is there, just look at the BIS data, the question will be who can tap into it and grasp the real opportunity that exists here – to become the de facto primary venue for FX swaps. There has always been an assumption that if such a change happened and primary FX swaps venues emerged, it would involve EBS and Refinitiv. It may still do so, of course, but it is not a “given”. This is a different world to that we have seen evolve in spot markets and the FX industry has, I suspect, learnt a valuable lesson from the fragmentation of liquidity and as such is likely to back a much smaller group of venues (probably two for the inter-dealer space). Assuming the cost of trading is reasonable enough (and don’t rule out a brokerage war at some stage), the identity of these two platforms is actually anyone’s guess, but we do know it would be foolish in the extreme for the primary venues to ignore/be complacent when it comes to the FX swaps market’s evolution.

The changed nature of trading means that spot FX volumes – without sustained volatility and it is hard to see what would bring that in the current market structure – are unlikely to be enough to sustain many businesses, let alone meet demand for growth from owners. The story in FX swaps is radically different and that is what makes 360T’s move interesting – not only is it the first major move to be made in the next evolution of the market, but it is the first for some time to target an often overlooked segment – the banks. The next topic of interest in this space is simple – how will the competition react?


Twitter @lamboPnL

Colin Lambert

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