Talk to any service provider – the customer is at the centre of everything they do. I am, therefore, a little confused, or perhaps fearful for those pushing this line, by some of the data in the latest turnover survey by the UK’s FX Joint Standing Committee (JSC). Of course, at the same time as being a little confused I am going to claim that the following justifies my repeated assertion in this column, that the banks in particular need to go back to being in the risk taking game and, for once perhaps, the numbers back me up!
It has to be pointed out that the JSC survey has, over the years, thrown up the occasional strange looking scrap of data – and some have proved to be outliers, but even so there are some interesting, and worrying, snippets in the latest set. If we take the customer base to consist of three broad groups – Other Banks, Other Financial Institutions (OFI), and Non-Financial Institutions (NFI), then the latest survey has all three groups at recent lows in terms of their share of activity, across most product sets.
The facts are in spot other banks were responsible for 21.4% of turnover in October 2019. This is just a shade lower than the average (22.1%) over the previous four October surveys, and down from 23.1% in October 2015 when I started looking at the numbers. As far as our friends the OFIs are concerned the number is even starker, this segment was responsible for 30.3% of turnover in the latest survey, down from 40.2% in the previous October’s release and significantly below the average for the previous four surveys of 37.9%. As far as NFIs are concerned activity as a share of the overall actually went up slightly to 3.6% (the average has been 3.4%).
Overall across the five surveys, spot activity in the UK has been broadly steady with an average over the previous four years of $720 billion, compared to the $753 billion in the latest survey. So these segments, save for NFI, saw a lower share in a busier market.
As far as NDFs are concerned, it’s a similar picture, although the data is more volatile. Other Banks’ activity was 15.5% in October 2019, compared to around the 14.5% mark in the previous two October surveys, but down on the 19.1-2% in the two before that. Again, the share of OFIs has fallen quite sharply, to 18.2% in the latest survey, compared to 28% in October 2018, which was itself down from 30% in October 2016 and 37.1% in October 2016. The latter was a slight increase from 2015, when it was 35.2%. Again NFIs share of activity has gone up, to 9.9%, unchanged form the last survey but up from the 5.5-6.0% area the previous three surveys.
To save you all I won’t go through the other numbers, apart from to say that the pattern with OFIs is repeated with that segment’s share of activity in outright forwards and swaps being below recent levels.
All looks bad then, in terms of those seeking to build a business on customer flow and this should inevitably lead to a fall in revenues given how the banks are not in the risk taking game at the moment, as I have discussed before.
But is it? In reality, the UK data reinforces the point that the banks are becoming brokers in this market rather than principals willing to take on risk. Apart from in NDFs, and that remains a relatively nascent market in terms of structure, the share of volume via a prime broker has risen.
In spot, the share of PB is 44.9%, about 2-3% higher than recent October surveys; and in outrights it is 32.8%, continuing an upswing from October 2015 when it was 23.1%. This is an exact reverse of what is happening in NDFs where the share via PB was 29.1% in October 2015, it popped up to 32.9% the following October, before dropping sharply a year later to 23.6% and then 22.6% in October 2018 before collapsing again to just 15.3% in the latest survey.
There is much that can be made of this data – and that is something to be remembered as we become more obsessed by numbers with every passing day, there are many potential interpretations of the same number. To me this highlights how more banks are seeking to build a fee-based business at the expense of risk taking, as I argued recently. They are facing off to these clients less as a principal and more as an agent.
Whether or not I think this is healthy for the market is irrelevant (it’s not by the way), and while these numbers may back up my assertion over the changing direction of the banking FX model, they may also shoot down another of my theories. After all, if the customers are still dealing and the banks aren’t dealing with them, then where are they going? Obviously the data may highlight the increasing impact of the non-bank players, but it could also (deep breath) perhaps signal that those people pushing the peer-to-peer model may not be wrong as I am fond of stating.
That said, given this column’s motto of “always certain” I have to close by observing that the data is showing what is happening at the moment – all it needs is one blow up where there is no match for a buy side firm and we’re back to square one and I will be claiming another pyrrhic and convoluted victory!