Cboe Targets Regional Banks with UBS Credit Arrangement

Cboe FX announces today that UBS is acting as a Central Credit Intermediary (CCI) for certain counterparties wanting to access its platform, with an eye to bringing on more liquidity from regional banks.

Under the new arrangement, regional banks or other financial institutions that might have limited bilateral credit can leverage UBS as a spot FX intermediary to alleviate this hurdle, settling all trades exclusively with UBS. The potential benefit of this for these institutions, according to the exchange, is that they will gain exposure to a greater number of Cboe FX participants despite the absence of direct credit relationships.

UBS has been live as a CCI on Cboe FX now for approximately two months and James Arrante, director, FX business management at Cboe, says that a handful of clients are already using the service with a “robust” pipeline of more to come. In particular, he says that there is demand coming from Asia, where there are many regional banks and credit conditions are sometimes more challenged than in Europe or the US.

“Is this going to be a game changer?” says Arrante, speaking exclusively to Profit & Loss. “In the Asia region in particular this may solve for the credit issue that has possibly prevented us from onboarding some of those clients. In sheer ADV terms though, I can’t really say that this is going to be a huge windfall for us, but I think that accessing a new client base is important.”

Bryan Harkins, executive vice president and co-head, markets division at Cboe, adds: “Although a regional bank is not going to move the needle, so to speak, on our platform, they add to the diversity of the liquidity on it and that creates a stickier market for us. The FX business is competitive and all the platforms out there have the top bank and top non-bank liquidity providers, so now it’s about the regional banks and the unique pairs that they’re trading, that creates the richness and diversity of the platform.”

Harkins also highlights that today’s announcement is part of Cboe’s broader strategy within the FX market.

“It’s part of the overall fabric of what we’re trying to build. We’ve executed on a lot of the low hanging fruit in the FX market, now we have a global sales force in New York, London and Asia and their job is to find unique pockets of liquidity, new relationships to bring to our market, unique pairs that are outside the more concentrated liquid pairs. This is a key component to that strategy,” he says.

The release announcing the partnership notes that only “eligible counterparties” will be able to use this new service, with Arrante explaining that this means that UBS will conduct a full credit check on any potential clients that want to onboard to the platform and that it will be restricted to clients that already have some form of credit relationship with the banks.

Although there’s no exclusivity element to the arrangement, meaning that in the future other banks could theoretically become CCIs on Cboe FX, Arrante and Harkins reveal that they are not currently in discussions regarding this.

Explaining why they chose UBS as a partner, Arrante says: “UBS was extremely competitive in terms of the commercials; they clearly wanted the business and put forward the best effort in terms of getting the legal side of the equation completed. We’re also very comfortable working with UBS and they have a tremendous amount of credit with these regional players that we’re talking about.”

Looking ahead towards 2019, Harkins says that one focus for Cboe on the FX side will be on continuing to develop its NDF market, and that this further plays into the strategy of focusing on building out liquidity from regional banks. Having launched a Swap Execution Facility (SEF) for NDF trading in 2017, Cboe FX is continuing to onboard prime brokers and banks to that platform, which Harkins says “goes hand in hand” with the strategy of focusing on building out regional bank liquidity because many of the NDF pairs are EM currencies and that in those domestic markets, there are regional banks that Cboe is targeting for its spot business too.

Another big theme for CboeFX in 2019, according to Harkins, is a continued focus on using data analytics solutions to improve matching on the platform.

“How do we pair like-minded liquidity? How do we bring tighter spreads and lower market impact for both makers and takers on our platform? We believe that the answer lies in data and mathematical techniques,” he says.


Galen Stops

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