As interest in prime brokerage continues to grow, so too do the services provided by the banking industry to meet client needs.Earlier this year, Deutsche Bank enhanced its offering to clients with the launch of e-switch, a prime brokerage module that Joe Norena, head of Global Liquidity Services (GLS) at the bank, believes is, “Different to most other offerings in the market and provides clients with a more extensive prime brokerage solution.”
Prime brokerage is one of four core products offered to clients by GLS, which also includes margin trading, which Norena says brings a new type of liquidity to the bank’s clients; streaming price API, a liquidity pipe from Deutsche’s streaming executable prices to the client’s workflow platform; and Autobahn FX, Deutsche’s newly released trading platform.
E-switch was developed after an internal study found that prime brokerage operations staff were spending up to 70% of their time booking trades, according to Andrew Coyne, director of GLS FX prime brokerage. “This is an essential process,” he says, “But it was not an efficient use of resources.”
Norena agrees, adding, “The prime brokerage process is not scaleable in a manual environment – manual processing is not the right model for this business. As well as providing us with scalability, e-switch brings great efficiencies to the clients in that they only have to book the trade once.”
Coyne believes that the key differentiator for Deutsche is technology. “Over the past 18-months we have seen the market go through a paradigm shift closely connected with e-commerce developments,” he says. “The important issue is that clients can access Deutsche Bank liquidity and prime brokerage liquidity through their preferred medium, be it our Autobahn FX single bank platform or a multibank portal. Our technology has been developed to be flexible and scaleable to enable our clients to realise efficiencies across all products. Prime brokerage is a model that lends itself to other asset classes. For example, we have an energy prime brokerage model as well as the more traditional Equity Prime Services and Global Exchange Services models.”
Coyne sees prime brokerage as an essential part of Deutsche’s four core liquidity offerings. “It remains something of a niche product; however, it is a business that is still growing,” he says, “Increasingly, asset managers are looking at FX as a separate asset class, and at prime brokerage as a liquidity source within FX. We are also seeing lots of interest from outside the asset management segment. The growth in interest and business has been quite dramatic.”
A strength of e-switch, says Coyne, is that the information comes from clients’ trade capture systems. “E-switch enables clients to send a formatted message of their transactions automatically. This means that the information does not come from the trader via email or voice, which dramatically reduces the chances of errors. It does not matter where the client has executed the trade – as long as the trade is in their system, we can automate it.”
He adds that e-switch enables Deutsche to reconcile clients’ books and act as a trade matching engine, which then displays the entire lifecycle of a trade. “The trade arrives unallocated and unmatched from the client’s system, as the counterparty bank’s side arrives, it is matched,” he says. “And because the system displays the status of different trades as they go through e-switch, we can manage the settlement process on an exception basis. Clients can automatically send splits to e-switch; these are also matched to the block trades received from the counterparty bank.”
Unlike some other offerings, e-switch does not require a single messaging template. “We recognise that we cannot force clients to format their messaging into one template, so we have created templates for each client,” Coyne explains. “We have a wide range of clients with differing needs, resources and systems, and they can only deliver message types within their own system capabilities. E-switch does not force a template on clients; we establish a bespoke template for each one. If for some reason the client does not use the established template, this generates an exception to enable the matter to be dealt with quickly and easily.”
Client feedback since launch has been “very positive”, according to Coyne, and Deutsche is seeing increased interest from the corporate sector as well as the institutional side. “Clients are recognising the extended operational efficiencies e-switch can bring,” he says, “I think it is fair to say that we are still the largest FX prime broker, and our technology has raised interest even further, including interest from the corporate sector, who tend to be more concerned with efficiencies that can be gained on an operational, rather than credit level. Some corporates have to consider credit concentration issues, so, for example, they may prefer to prime broker their worst operational counterparties.
“Clients feel e-switch has made a big difference to their operational lives,” he continues. “They have a window on Deutsche Bank FX prime brokerage that enables them to see the status of their accounts and operations at any time. They can better organise their workflow, it is no longer a chore to give up a trade. We cannot blandly state that we can achieve 100% efficiency; however, we have not had a single error since e-switch was launched in February – it has made everyone’s life much easier.”
Coyne accepts that prime brokerage has become subject to price pressures in recent months, but stresses that Deutsche is meeting these pressures by ensuring full straight-through processing for clients’ trades. “We are also providing a higher level of service,” he says. “A big difference brought about by e-switch is that our prime brokerage operational staff are now able to provide value added services to clients. They have more time to deal with ad-hoc queries and one-off requests.”
The FX prime brokerage unit also works closely with other services provided by the bank, adds Coyne, to ensure that the majority of Deutsche’s clients that deal across multiple asset classes can benefit from a tailored solution. Included in these solutions, he explains, is a service that allows the bank’s CTA and hedge fund clients to trade both futures and cash FX over the same platform using Deutsche Bank prime brokerage. Clients can receive as many of Deutsche’s prime brokerage services as they require through a single pipeline. “Prime brokerage is a product that requires a high degree of tailored solutions,” he says. “We have created bespoke solutions for many of our clients and have several more initiatives in the pipeline to enhance our service even further.”
As well as the asset management and corporate sectors, Deutsche has also seen interest from the banking industry in its FX services. A bank desk was recently opened in the London and New York offices to service a sector that Norena says Deutsche has targeted aggressively. “The bulk of FX volume remains bank to bank,” he says, “Many banks are undertaking consolidation efforts, looking at their business models and how viable their dealing operations are. They are looking to concentrate on their core competencies which tend to revolve around strategic or regional specialties.
“It is becoming tougher for these to compete with banks in the top 10,” he continues. “In effect, we are offering our experience over the past five or six years as well as our services. It is not just about technical expertise – we have been through what many banks are starting to go through now.”
Norena also notes that Deutsche has been seeing a sharply accelerated adoption of online trading, something that may have been driven by the launch of Autobahn FX in July. Autobahn FX comes in two parts: the liquidity window provides streaming spot and forward prices in 262 currency pairs, and a white label product, which Norena says specifically targets financial institutions to allow them to offer Deutsche’s experience and services to their own clients.
The white label product includes the provision of margining, as well as client maintenance and relationship tools. Norena adds that the bank is looking to build a white label version for its fixed income business following feedback from clients. The bank is also looking to develop a multi-product API within Global Markets and develop further its FX derivatives capabilities.
“Our feedback from clients has given us insights into how their business models are changing,” says Norena. “This has helped us create solutions to enhance these models. We have a huge product suite to meet all the needs of our client base and central to that is foreign exchange, which is a product that impacts across all areas of the business community. We believe FX has huge potential for growth and we are committed to the highest quality services to all customer segments to help support this growth.”