P&L Report Card

It may have been the circumstances at the time the demonstrations were scheduled, but prime brokerage definitely seemed to have a lower profile this year. Obviously in such an uncertain world, credit strings inevitably tighten and there is a school of thought that the next evolution will actually be a step back, with the major firms again cutting their client tail. We are less sure of that because another factor in the low profile could be that banks are generally satisfied with their current client base and offering and see no need to change.

Although it was around this time last year (in terms of when most of you are reading this) the reverberations from Citi’s decision to trim its FXPB business and roll it into a broader prime services model continue to be felt, for we still found users of prime services this year that were being serviced by a prime-of-prime provider rather than one of the major banks. The sense is that some clients discarded by Citi were snapped up, but others have found it more of a struggle to get back into a bank PB – it could be the business model, it could be they were too late out of the gate, whatever it was, the prime-of-prime industry gets more good clients.

On the subject of Citi, it was heartening to us that last year there was not huge surprise when we didn’t unveil the bank as winner of this award – and spoiler alert, it doesn’t win this year either – call it a sense that the bank was in the throes of the revamp of its business or just luck on our part, but there didn’t seem the direction in February 2019 that exists now. The decision was made to refocus PB and while it is for others to debate the benefits or otherwise of FXPB not being part of the FX business – to date we would argue that clients seem to prefer it “in” rather than “out”, but we are facing a whole new world post-pandemic – Citi knows where it wants to go and how it wants to get there.

We should stress that Click has not become a bad product overnight, it remains one of our favourites, rather that development work has obviously suffered a hiatus as the revamp of the broader business takes place. Click remains a pioneering solution for FXPB with its rich mix of graphics and data and over the past year it has worked with third parties to build efficiencies into the process – not unlike FX businesses of seven years ago, the work is largely about connectivity at the moment and embedding these services into the client business model.

We confidently expect Citi to rebound strongly in the FXPB space, but it will be a targeted approach, and the new model will not be FX-specific and it will embrace clearing, futures, options as well as solutions to help clients better manage their margin. When will this happen? That is an interesting question to answer – the ambition is clearly to be well on the way by the end of this year, but with the current upheaval in the world the work may be drawn out, meaning that Citi’s peers will have a little more breathing space without a real giant of the space breathing directly down their neck.

On the subject of third parties, it would be remiss not to mention how two more firms are inexorably creeping into the infrastructure of the PB world to join Traiana. Multiple PBs openly discussed how they are working with Capitolis and Cobalt on various solutions aimed at both simplifying the risk management as well as the balance sheet impact of supporting the business. We confidently expect both firms to play much larger roles in the FX market’s infrastructure as the years progress.

Elsewhere, and back to the banks, HSBC, as we shall detail later, made a huge move forward over the past two years and has built a really strong PB offering that, coincidentally enough, reminds us of Click in its look and feel. As the broader Deutsche Bank continues to recover from its financial woes, we also expect to see this institution become a more prominent player in FXPB. Deutsche has always, and this is a very geeky thing to write, been very strong in the area of blotters, a key element of a good PB offering, so we expect big things in the year ahead. UBS and BNP continue to have their supporters amongst users.

Overall though, it was noticeable, as we mentioned earlier, how many users now talk about their prime-of-prime providers. These firms don’t qualify for these awards (and rely upon banks for their services so are clients themselves); however, we expect strong competition in our Readers’ Choice Awards later this year!

For now though, not for the first time in these awards, we have a repeat winner.

Winner – NatWest Markets

We noted in these awards last year when unveiling NatWest Markets as our winner, that the bank tends to think differently about prime brokerage, and the last year has reinforced that notion. The strength of the bank’s offering remains its proprietary technology which has led to several different models under the broader risk umbrella – just as some banks are seeking to unbundle their services so NatWest has effectively done so in PB. There are different flavours, which one suits you?

A very interesting development we caught whispers of this year is that other banks that do not have a prime brokerage business, are actually entering into white label agreements with NatWest to use its PB technology. We have said in these awards before, that peer recognition is often the best form of feedback and that seems to be the case here. It is, again, testimony to the genius of the business design that a plug and play model suitable for other banks is readily available. Many years ago we noted the open, flexible nature of Agile Markets, NatWest’s technology platform, those strengths continue to help the bank build its FX business thanks to the platform’s reusable technology.

In short then, NatWest continues to deliver a PB service to a tremendously broad range of clients, from retail aggregators and prime-of-primes, through HFTs and asset managers, to some pretty big banks – that is some range of clients for a prime brokerage offering.

The bank has, over the past year, added more complex options to the list of products the PB business supports. This is no easy lift for a PB provider, not least because Target Forwards, for example, often go by different names and have a range of product nuances across providers. To help solve the problem, NatWest has developed a template to standardise as much of the trade details as possible, thus cutting down the number of things that can go wrong – and in the structured forward space, such is the breadth of offering, there is a lot that can go wrong!

The bank has also rolled out more services to allow clients to deal via inter- dealer brokers, especially in “covered” products where the regulatory burden can be onerous, this especially helps the bank’s non-bank market maker clients become more embedded in the “core” market function and could, just could, have a significant impact in the FX swaps market going forward.

An example of how NatWest thinks a little differently can be found in how it handles what rapidly became a bete noir for PB, high frequency trading firms. Instead of trying to monitor the risk from every single one of the thousands of transactions given up by these clients, NatWest has instead built an internal ledger to which these trades are directed. Given how the market risk profile is often minimal on the client side, this makes sense and allows the bank to effectively risk manage these firms in a different manner to other clients – again the benefit of the hydra approach to PB – while at the same time freeing up other parts of its FX business from having to try to keep up with the rapidly changing risk picture. It just unclutters the FX business, which can only be a good thing.

Last year we observed that if there was one area we would have liked to see a change in the business it was in more visualisations – in such a data heavy business being able to identify the KPIs and key issues quickly becomes more of a challenge. We are pleased to report, therefore, that another enhancement over the past year from NatWest has been better use of visualisation tools. It doesn’t have to be complex, but being able to identify that there is a problem quickly is the best way we can think of to solve it quickly.

NatWest has always had a loyal client base for its PB business and while that support was shaken during the aftermath of the financial crisis, it was not broken. Those clients and the hordes of new customers that have flocked to the bank have not been disappointed, for NatWest Markets has what we – and many others – consider to be the best FX prime brokerage offering on the street.

It has achieved this by being innovative, open to collaboration with third parties, and cognisant that clients come in many different flavours. At a time when banks continue to be very careful over the clients they accept for the PB business, the best in the game has opened its doors – and proved it can cope with the influx.

Colin Lambert

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