FX HedgePool launched its new buy side-to-buy side swaps matching utility – FXHP – last Friday with three asset managers, including Vanguard, Eaton Vance Management and a European manager, along with Standard Chartered Bank operating as credit provider. The launch focused on a single currency pair – EUR/USD – and although the firm declines to put a number on it, says volume was “sizeable”.
FXHP was started last March by a trio of FX industry veterans – founder and CEO Jay Moore, and co-founders Richard Leader and Emin Tatosian. Moore was most recently global head of currency administration at Brown Brothers Harriman in New York, while Leader and Tatosian worked together at Caplin Systems for a number of years before they co-founded FastFin in 2014, and then joined up with Moore last year.
FXHP is designed specifically for buy side firms executing passive FX hedging programs, because they have a scheduled, predictable and repeatable need for execution. From the buy side perspective, Moore says the appeal is not only about the spread, but in avoiding market impact, reducing tracking error and enhancing operational efficiencies. “Because passive trading is so predictable, banks know it’s coming, which exposes the buy side to market impact. Peer-to-peer matching eliminates that,” says Moore. “Additionally, trading desks often need to work an order through over a number of days, which can introduce tracking error and consume resources. FXHP allows them to align to benchmarks while ensuring valuable trading desk resources can focus on higher value trades.”
Moore says the group expects to reach 20 buy side firms joining the “membership” by year-end, but adds that it’s more important they focus on selectively curating the firm’s growth to ensure a healthy pool, than on growth in terms of client numbers.
On the bank side, Moore says FXHP aims to add five or six additional credit banks in the next couple of months, and that participating as a credit provider is an opportunity to capture market share and monetise the balance sheet without taking on principal market risk.
Moore notes that of the banks his team has spoken to, many consider the monthly rolls to be burdensome, low-margin, and high risk – making the notion of carving out a portion of existing credit lines to secure annuity-like revenues appealing.
Luke Brereton, co-head of Prime Services at Standard Chartered Bank, says: “FX HedgePool has opened up a very large market for us to provide credit intermediation services, where we have a great opportunity to earn a return by deploying capital through the credit relationships. We’re providing a central credit model that is helping the buy side separate credit provision from the search for liquidity and we’re also supporting access to multiple additional credit participants, which is a really attractive mechanism.”
Moore adds, “Standard Chartered Bank has been an innovative partner, not only signing on as the initial credit provider, but helping us develop and facilitate a multilateral credit allocation model that will allow us to maximise our matching potential by offering our members access to a diverse panel of participating credit banks.”
Moore stresses that the FXHP technology doesn’t introduce complex integration requirements, “it’s a utility that’s extremely simple to onboard members”. “From the start, we resolved to create a system that seamlessly slots into existing workflows with little to no direct integration requirements for its users,” adds Tatosian.
“We couldn’t be more excited about the partnerships we’ve formed on both the buy side and sell side,” Moore says. “Our vision is to enhance transparency in the FX markets by creating a viable, sustainable and trusted utility that is shaped and inspired by the people who use it.
“Best execution goes far deeper than just price,” he continues, “it’s about being able to step back and evaluate the many factors surrounding the trade; including spreads, market impact, tracking error, operational risk and counterparty management – all of which are core to our value proposition.”