P&L Report Card: The last year has seen the final breaking down of barriers between emerging markets and G10, helped in part, it has to be said, by the odd liquidity event in G10! A big factor in the blending of the (major) emerging markets and G10 has been the ability of the non-bank players to really get into the former, firstly via NDFs but then in the cash markets. One or two multi-dealer platforms are helping the process and generally speaking, data appears to be improving – this remains the lifeblood of the non-bank market maker. Of course, if we thought that market impact was an issue in the G10, imagine how people feel about it in EM?
P&L Report Card: We have to repeat ourselves at the start of this award write up. There is, as we have experienced over the past three years, a degree of sensitivity over who we consider “regional” or “super regional”! Generally speaking we have sought to target this award at banks from outside the top 10 e-FX institutions that are helping regional customers. It’s part emerging markets and part technology provider. The field is quite broad for this award, anyone who, for example, empowers customers and other banks can be considered, but we want that little twist that is a focus on certain regions.
P&L Report Card: Yes, we are going to start with our annual reminder that servicing one’s peers is always the hardest task, mainly because their background is similar; they could be potential competitors, and as far as service levels go, they are very demanding! The past two years has seen more banks come up the curve in terms of technical knowhow and product development, so servicing this critical segment becomes even more challenging – for both parties.
Whilst the global bank has to capture some value from the flow, the regional players’ need to provide best execution means they are a lot more selective when it comes to where they trade.
P&L Report Card: The key to a superb service to corporate FX clients remains flexibility and the ability to provide for a huge range of customers. From the biggest multinational with its very sophisticated technology and execution desk, through the standard corporate hedging desk, down to the corporation seeking to make international payments, no other client segment offers such a broad spectrum. Inevitably, given how the focus for years was on volume and market share, the top end of corporate town is well catered for by just about every bank.
Likewise, several banks have solutions for payments.
P&L Report Card: I f there is one client segment that is in the eye of the storm when it comes to execution quality and market impact, it is real money. Execution desks are well aware of the challenges that currently exist in the FX market, however the same cannot be said for their oversight function – too many of which still seem to believe that top of book is good for 100 million. So the real money sector remains at the centre of the upheaval around best execution.
Putting aside this segment’s use of the WMR Benchmark Fix, this client set is possibly the most challenged of all segments due to its need to shift larger tickets into the market.
P&L Report Card: This remains a strange time for hedge funds, because the discarding process that we have witnessed for almost two years now seems to have accelerated. Part of the problem is a clash of cultures – the hedge fund manager has a direct obligation to its investors to make every dollar and cent count and this inevitably means there is less on the table for the banks. Throw in a key skill of the hedge fund manager – market timing – and you have even less enthusiasm on the part of the banks to embrace the sector to the degree they once did.
This is not to say the relationship is irrevocably broken however, rather that, as banks focus on the tail clients, hedge funds figure quite highly in that group.
P&L Report Card: This award remains about information and interaction. Traders need more information than ever before and they need it in an easy to read format, preferably on the same desktop (or mobile device) as their pricing. They also need excellent analytics, because their decision-making process has to be as informed as it can be if they are to succeed in what remain tricky, event-driven markets. This means a clean dealing tile – the origins of this award – remains important for GUI traders, and we would highlight that GUI traders typically offer better value to a provider bank than a fully automated client.
P&L Report Card: Given the focus on regulatory compliance, probably the one area as busy – probably busier – than the technology development teams, is the back office. Post-trade is where the box ticking is done, the checks and balances exist here. We have noted in previous years how we view the end game in post-trade as being based very much around a utility model – the stricter the rules get, the less room there is for manoeuvre and innovation.
P&L Report Card: There is something of a paradox in how the algo execution space has become much more competitive in terms of providers, but the overall take up – while it ticked higher last year – remains subdued. There is so much emphasis on best execution, liquidity management and analytics – most of which falls to the algo execution teams to deliver – that one senses it is only a matter of time before demand surges. If it doesn’t, there is a lot of client facing technology to be accounted for, of course, but it should always be remembered that a lot of the client facing ideas that we see in the market have also driven upgrades in banks’ own ability to participate in FX markets.
P&L Report Card: The next 18 months are going to be interesting for the banks’ research teams, not only do they have a rather erratic geopolitical situation to deal with, but they are also firmly in the firing line over MiFID II. Post-January 1, 2018 will be the time when we learn a lot more about how important clients actually think research is, and while paying for research is only a small part of the regulation, it will have a large impact on this segment of the FX business.
We have noted previously that the more in-depth reports are lightly read – partly this is a question of time, and partly it is a question of the value of such reports.