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Special Reports

Capitolis: The Airbnb of Credit? Galen Stops speaks to market sources about the feasibility of splitting prime services into credit provision and trade processing. Capitolis is the latest venture headed by Gil Mandelzis, the former EBS BrokerTec and Traiana CEO. Mandelzis co-founded the company along with his former Icap and Traiana colleague, Igor Teleshevsky, and former Thomson Reuters CEO, Tom Glocer in New York earlier this year. Mandelzis operates as CEO of the firm, Teleshevsky is VP of R&D and Glocer is listed as an executive chairman.
OTCXN: Can Digital Solutions Bring Back FX Growth? Galen Stops explains how OTCXN is applying blockchain technology to help firms access wholesale liquidity. OTCXN seeks to leverage its own proprietary blockchain technology to solve what its CEO and founder, Rosario Ingargiola, says is currently the biggest challenge in the FX market: accessing wholesale liquidity. This challenge is caused by a credit gap in the market, according to Ingargiola, that has in turn occurred because the banks have been broadly reducing the number of firms that they are willing to extend credit to.
Is the Stage Finally Set for FX Clearing? Galen Stops takes a look at whether the predictions of FX moving towards a centrally cleared model might finally be coming true.  Central clearing for FX has endured a number of false dawns in recent years. As long ago as 2011, Profit & Loss published an article, “FX Clearing – Are You Ready?” in which it was argued that Dodd-Frank was likely to drive FX options and NDFs products into clearing. Then back in the first quarter 2014, staff at the US Commodity Futures Trading Commission (CFTC) indicated that the guidelines for the mandatory clearing of FX derivatives products, which included NDFs could be finalised within weeks. Indeed, Profit & Loss reported in mid-June 2014 that the CFTC was poised to fire the starting gun for mandatory FX clearing.
OTC FX Options Clearing: Are Prime Services Ready? They may both have been a long time in the pipeline, but the wait for CME and LCH’s introduction of OTC FX options clearing services is nearly over. Yet with both due to launch before the end of 2017, just how much appetite is there likely to be from the prime services sector to support these initiatives? Nicola Tavendale writes. While there are many different ways institutions can try to reduce their capital costs, clearing is by far the most efficient, according to Paddy Boyle, head of ForexClear at LCH. And even before the advent of the uncleared margin rules, there were already significant benefits to clearing non-deliverable forwards (NDFs), both in terms of enhanced risk management and obtaining operational and capital efficiencies, he adds. “Since the uncleared margin rules were implemented in September 2016, clearing has become a much bigger priority for many firms,” Boyle says.
Making the Case for the Prime-of-Prime Model The traditional assumption in the FX industry is that accessing a bank prime broker is always preferable to using a prime-of-prime. Galen Stops speaks to service providers seeking to challenge that assumption. “One thing that’s quite interesting is that in the mindset of the FX industry, there’s a certain hierarchy,” says Jonathan Brewer, managing director of IS Prime. “There’s basically an assumption that if you want to participate in the FX market, then the pinnacle provider that you should aim for is a tier one prime broker (PB), and then you should only go and look for a prime-of-prime if, for whatever reason, your face didn’t fit at a tier one PB.” Although to some degree this hierarchy might be psychologically driven, there are also very valid reasons why market participants might prefer an FXPB to a prime-of-prime (PoP) offering.
Prime-of-Prime: A Risky Business? Galen Stops takes a look at some of the potential risk concerns associated with the prime-of-prime model in FX. I n a recent survey conducted by Profit & Loss 57.25% of respondents said that they think the trend towards more firms using prime-of-primes (PoPs) rather than traditional FX prime brokers (FXPBs) could increase the impact of a shock event. This is in contrast to 27.48% who said that it won’t and 15.27% who think the impact of a shock event would be unaffected by this change. The logic underpinning this concern is based on the fact that risk is increasingly being pushed towards less well-capitalised institutions.
Spot the Difference: Defining “Prime-of-Prime” "Prime-of-Prime" has become something of an umbrella term these days, used by many firms operating very different business models. So Profit & Loss asked a number of firms that place themselves in this category exactly what constitutes a "true" prime-of-prime service provider.
The Real Deal Numerous firms have spotted an opportunity to capitalise on the current credit constraints in the FX market by offering a “prime-of-prime” solution. But what are the different models being operated by these firms and what should market participants be looking at in order to spot the real deal? Galen Stops reports. It’s no secret that over the past couple of years, some of the biggest FX prime brokers (FXPBs) have been off-boarding existing clients, while simultaneously raising the bar in terms of the capital requirements for new clients. But while the willingness of these banks to extend credit has reduced, the need for market participants to access it in order to trade the FX market has not, as noted in the introduction to this special report.
Clearing the Hurdles What are the biggest challenges still facing FXPBs today and how can they be overcome? Galen Stops takes a look. There’s no getting around the fact that regulation has changed the economics of the FX prime brokerage (FXPB) business, and not for the better. “You can classify PB costs into three basic categories – technology, human resources and direct transactional costs,” says Sanjay Madgavkar, global head of FXPB at Citi. The first two of these are fixed costs that an FXPB has to pay, but the new regulations under Basel III have made it more expensive for banks to provide FXPB services to certain clients, meaning the overall profitability of some portfolios has fundamentally declined. “
Regulation Forces FXPBs to Reinvent It’s no secret that recent regulatory requirements have put FXPB business models under increased pressure. But some firms also see regulation as an opportunity to change how their businesses operate in order to win new business, as Galen Stops reports. When questioned about the extent to which a combination of the Basel III regulations and the SNB event had caused a contraction in the FXPB space, there was some pushback from certain service providers. “I think that there’s a misperception that there has been a wholesale contraction in the FXPB space,” says John O’Hara, global head of FXPB and FX clearing at Societe Generale.