Atlas Bank Eyes a New Model for FX Clearing

Galen Stops takes a look at how Atlas Bank is taking a new approach to prime banking and clearing processing in Latin America’s FX markets.

Atlas has been around for quite some time now, and in fact has a long history in the FX industry. The group initially formed in 1994 with the launch of the ECN, NexTrade (which was subsequently sold to Citigroup in 2006), and then in 1998 the founders of the group created MatchbookFX, a spot FX ECN that integrated retail trading and clearing and settlement.

The group is now looking to leverage this experience with the launch of Atlas Bank, a Panama-based and general licensed bank that began operating in October 2017 and is focused for the time being on offering prime services to FX market participants in Latin America.

“We opened this bank with the main purpose of providing firms in LatAm with access to the global liquidity and the global infrastructure of the FX markets,” explains Otto Niño, senior vice president and head of clearing and settlement at Atlas Bank, by providing an enhanced risk management structure and technological infrastructure for clearing and settlement of forex markets.

Niño points out that, traditionally, firms have accessed FX market liquidity through financial institutions that have the infrastructure, technology and legal vehicles to help support their trading activity, generally either the large global dealers or some form of local intermediary, such as a broker. But, he says, this structure implies more nodes on the network and more institutional points of connection, which in turn increases operational risk, decreases the ability for regulators and authorities to conduct effective oversight and raises costs. On top of this, in the post-financial crisis era, capital has become more expensive for the big dealers, so they are more selective over which firms they will offer intermediary services and credit.

“Many market participants in LatAm have either not historically had access to global liquidity, or they lost it in recent years due to the de-risking trends that we’ve seen in the market. So, the idea behind Atlas Bank is to empower the region with the infrastructure that the global players use,” adds Niño.

Risk management focus

He is at pains to emphasise that Atlas Bank is not an FX intermediary: it does not trade, offer brokerage or direct the risk taking of its clients.

“Clearing is our business and clearing is about risk management. We just provide market participants with the infrastructure and by that, I mean the technology and the processes to help them control and minimise their risk,” says Niño.

Otto Niño, Atlas Bank

The first step in offering such infrastructure is being able to receive collateral from these market participants and then in turn provide them with credit. This is why Atlas FinTech Holdings had to create a bank and ensure that it has enough capital to be able to provide balance sheet to its clients.

After this, there needs to be some mechanism or tool put in place to allow these clients to access the markets. This kind of technology is fairly commoditised at this point, as there are numerous vendors, brokers and white label distributors clamouring to sell it these days. Indeed, Atlas Fintech Holdings itself sells this type of technology under a third-party license and Niño claims that it sits behind many of the large global dealers’ terminals. Thus, Atlas Bank has taken what is effectively in-house technology to build AtlasFX, its platform for trade execution and processing.

After execution, the next piece to consider is clearing and how the bank will handle risk. This is an area where Niño claims it is taking a different approach.

“Given the volatility of the currencies we want to focus on and the type of clients we want to serve, we decided to look at risk earlier in the trade lifecycle. We take an initial measurement of risk when the client first signs up, so when we grant a line of credit or request collateral for margin and open an account for the user, that’s when we set the profile of that user. And if they are within the limits allowed by that profile, then they can operate and trade. If they’re not within those limits then they need to adjust, meaning they have to provide more collateral or qualify for more risk. Which I think is an interesting approach because normally you either post more collateral or you can’t trade, there’s never been an incentive for participants to strengthen themselves so that they can get better credit,” he says.

“Emerging markets are fragmented and not known for aggregated high volumes, which is why we’re going for an all-in fee. How will we determine what this fee is? Like insurance, it will be based on the track record and profile of the client”

What does it mean to “strengthen” your business in order to qualify for better access to credit? Well, one example Niño gives refers to the FX Global Code. He says that firms that are committed to the Code and can demonstrate that they adhere to its principles of best practices are more likely to approach and have a perspective on risk to qualify for better or more credit.

Niño says that the other reason Altas Fintech Holdings had to set up a bank is that at settlement it could hold the collateral when it comes to cash, and he adds that there are plans afoot to have a clearing house based in the US so the bank can handle both cash and securities as collateral. When it comes to reconciliation, the AtlasFX platform can generate all the reports that clients need on-demand on an automated, non-manual basis, whereas in the past they’ve had to struggle with this process themselves or pay additional fees to outsource it.

“Once a firm becomes a client, the entire process of trading from end-to-end is in their hands,” says Niño.

Building on existing markets

Importantly, Atlas Bank will initially only offer trading in spot FX and NDF products up to three months out. The reason for this is predominantly just the compliance concerns associated with other products many banks have either less appetite or are restricted from trading certain FX products with LatAm firms due to regulatory concerns, such as anti-money laundering (AML) requirements.

It’s also worth noting that while Niño talks about empowering the LatAm region in general, the initial focus of Atlas Bank will in practice be somewhat more specific. Because the evolution of the capital markets in Mexico and Brazil have fostered the growth of FX trading infrastructure, these countries will be less of an immediate priority for the bank than countries such as Peru, Colombia, Chile and Uruguay, which have lessdeveloped financial markets.

“We want to focus on areas where we can offer our services without competing with what’s already been established and instead look to leverage what’s been accomplished in these places so far,” says Niño, adding that the bank can adapt to whatever local infrastructure has already developed in different markets.

“In terms of technology and processes, we are already at the same level as the top international banks. Our challenge is that our brand recognition has a 20-year time lag behind some of these firms, so we need to build up both our profile and the market’s trust in us”

“The degree of integration that we’ll have with the local markets will depend on how they have developed and that’s why we’re going about this country-by-country. So, for example, if I need to go and knock on the doors of local banks to start facilitating the generation of liquidity for a local currency, then we’ll do that. If there’s already a local ECN or exchange that is playing some role in the curve for a currency, then we’ll see how we can connect and work with them to expand. The idea is not to dismiss what has already been built but to expand upon it,” he says.

In terms of the commercial model, Niño says there will be a fee for utilising the bank’s services that will vary from firm-to-firm.

“Emerging markets are fragmented and not known for aggregated high volumes, which is why we’re going for an all-in fee. How will we determine what this fee is? Like insurance, it will be based on the track record and profile of the client. So, in FX for example, we cannot equate the risk profile of firms that have a real world need to trade FX, such as importers and exporters that actually need to make payments and deliveries, with alpha seeking or hedging firms. We will serve both segments, but clearly there is a distinction between the two and that will be reflected in the measures and conditions that we place on each,” he explains.

Crucially, Niño also makes the case that because Atlas can service clients throughout the trade lifecycle, they will benefit from a simplified fee structure where they just have one contract, as opposed to having a contract with a data provider, a terminal provider, a bank, an administrator, etc.

Building the brand

Panama was chosen as the headquarters for Atlas Bank because its dollar-based economy was seen by its founders as a currencyneutral location, and it is a commercial and financial hub for the region. Niño says that although the process of getting a Panamanian banking license was time consuming and required a lot of attention to detail, it was a positive experience for the company.

“It was a good exercise because it made us get out of our comfort zone and look at things from the regulator’s perspective. We understand the responsibility that regulators have because if they approve something then they’re effectively putting their name and signature on it as well, so we had to spend a lot of time and effort ensuring that they were happy and comfortable with the business model,” he says.

Recently, the bank was also granted an investment grade BBB- rating and a stable outlook by Equilibrium, an affiliate of Moody’s Investors Service that provides credit rating services in Latin America. Niño says that this makes it the first bank in Latin America providing clearing and settlement services to have obtained such a credit rating, and argues – with some justification – that the scrutiny associated with getting such a rating highlights the strength of both its business model and the technology, infrastructure, capital funding and human expertise that it has in place.

“[We’re] taking advantage of centralised infrastructure without requiring participants to be members of the club. And unlike the CCP model, we’re centralising the processes without centralising or aggregating the risk”

So, where does the bank go from here? Now that all the building blocks are in place, Niño says that the next step is continued outreach to both potential clients and various regional regulators.

“In terms of technology and processes, we are already at the same level as the top international banks. Our challenge is that our brand recognition has a 20-year time lag behind some of these firms, so we need to build up both our profile and the market’s trust in us. Then we also need to build out our teams locally in these different markets and continue working with regulators to help them understand that our technology can help make these FX markets operationally safer to mitigate the associated risks,” he comments.

The hope, says Niño, is not to revolutionise how FX trading occurs in LatAm, but to change how FX risk is managed by firms in the region. Right now, he says that there are two models available: one is to be a member of an exchange or clearing house and the other is to trade OTC in a bilateral manner. The problem with the former is that very few firms can actually qualify for membership, so they have to rely on going through a clearing bank. The problem with the latter is that it makes firms dependent on the availability of the lines of credit given to them by intermediaries and there’s no standardisation with regards to how counterparty risk is measured.

“We’re bringing the two models together, taking advantage of centralised infrastructure without requiring participants to be members of the club. And unlike the CCP model, we’re centralising the processes without centralising or aggregating the risk,” he adds.

Galen Stops

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