Articles tagged by credit
Franck Mikulecz, managing director of the newly established clearing house FXCH, explains why
and how his firm is using distributed ledger technology to clear spot FX
Profit & Loss: You’ve launched a clearing house to clear spot FX using ...
Louisa Kwok, head of prime of prime sales and products at ADS Securities London, explains to Profit & Loss deputy editor, Galen Stops, why there’s room for numerous different prime services models in the FX market.
With many of the traditional FX prime brokers (PBs) being increasingly selective about who they will offer their services to, this has created a gap in the market that many firms appear eager to fill. Subsequently, numerous prime services offerings are being touted to market participants under the banner of prime-of-prime.
Franck Mikulecz, managing director of FXCH, talks to Galen Stops, deputy editor of Profit & Loss, about how blockchain technology can help mitigate some of the credit challenges facing the FX industry.
With blockchain, or distributed ledger technology, still being so new to financial services, Mikulecz claims that banks are still trying to figure out the most effective way to deploy this technology.
“I can see a lot of banks have an interest because they know that the market will evolve and the market will potentially be disrupted by the technology but they don’t really know how it’s going to happen and they don’t really know how to use it themselves.
Brandon Mulvihill, managing director, head of FXCM Pro, explains that there is still not enough clarity about the different prime-of-prime services being offered in the FX market, and warns that it is a mistake to believe that these firms are currently ready to fill the gap left by the tier one prime brokers.
Profit & Loss: Since “SNB Day” there have been a lot of firms touting prime-of-prime (PoP) services to the FX market. Many of them actually provide very different services. Two years on from SNB, do you feel like these differences are better understood by market participants?
As access to credit has becoming increasingly constrained in the FX market, Noel Singh head of e-FX business development at Sucden Financial, explains that this is only factor at play in the evolving prime services space.
Questioned on the new credit reality in FX markets, Singh responded: “I think credit is only one aspect of the story and I think that post-SNB, when the top tier prime brokers lost money because their clients couldn’t make good the losses, that started it, but I think it’s now the concept of how much is the wallet worth to the prime broker.”
As buy-side workflows are becoming complex, these firms are looking for ways to simplify how they view and manage them, claims Basu Choudhury, business intelligence, Nex Traiana.
He says that, whereas in the past buy side firms used to probably have only one prime broker (PB), today they might have four or five prime brokers, or even have bilateral relationships. Further, when they execute they might do so via an anonymous venues or they might trade against another buy side firm that is using a prime broker.
“So what we’re seeing and hearing is that they want a single panel where they can see their PB relationships and bilateral, and even clearing at some point within one dashboard, one platform, where they can manage the matching, [confirmations] and settlements,” he says.
Following the launch of Sucden Financial’s new OTC FX options service, Galen Stops talks to Noel Singh, head of e-FX business development at the brokerage, about how it’s planning to diversify its FX offering.
Despite having an FX franchise that is over 30 years old, an e-FX offering that has been around for more than eight years and a balance sheet of over $100 million, Sucden Financial is not exactly a household name in the wholesale FX market.
But the firm is now working to change that as it seeks to diversify its FX business in response to changing market conditions.
TradAir has announced that GKFX, a broker regulated by the UK’s Financial Conduct Authority (FCA), has gone live with its margin/credit FX-CFD platform.
According to TradAir, the platform was developed in response to demand from institutional brokers for a margin and credit solution in one platform that provides effective pre-trade control over client access to liquidity.
The platform supports bespoke liquidity provision, granular per instrument leverage, and fully automated risk management decision making for periods of extreme market volatility or event risk, such as seen over SNB move and more recently with Brexit, the company says.
Noble Bank International recently launched with a new business model aimed at alleviating the current credit constraints in the FX market. Will it be a “game changer” for the industry? Galen Stops takes a look.
If every new product or service launch that claimed to be “game changing” actually was, the FX industry would be a dizzying place to work in, such is the popularity of this phrase and its variant forms.
As a result, it was hardly surprising to see Noble Bank International (Noble) hail its new real-time, post-trade FX service as “industry changing”, when its official launch was announced last month. And yet, if the Noble model manages to gain significant traction within the FX industry, it could have a significant impact on how the market operates.
Rosario Ingargiola, founder and CEO of OTCXN, argues that accessing wholesale liquidity is one of the biggest challenges in the FX market today that could be alleviated by fintech solutions.
Speaking about different approaches to the FX market by fintech firms, Ingargiola says that one strategy is to look at areas where new technologies can reduce costs in terms of how firms operate and another – which he says OTCXN is pursuing – is to use technology to change the way that firms operate altogether.
The area where he sees the biggest opportunity to change the way that firms operate using fintech solutions is around using credit to access the FX market.
NEX (Nex) Optimisation has launched an automated credit rebalancing tool that specifically addresses limit over-allocation by prime brokers.
Rebalancer went live across five major ECNs on 2 July 2017, with further platforms going live throughout the year.
Designed in close partnership with Citi, Rebalancer is deigned to enable dynamic allocation of credit across client trading venues, allowing clients to move credit from one platform to another in real time.
Prime brokers currently allocate credit to multiple trading venues but do not have the ability to move it around if there is excess credit on one and a shortage on the other.
The Q3 edition of Profit & Loss will feature an in-depth special report on FX prime services, looking at the significant changes that have occurred in this segment of the market and how these will impact trading firms in the future.
But we want to hear from you about your expectations regarding the future of FX prime services, which is why we're asking you to fill out this 1-2 min multiple choice survey: https://www.surveymonkey.co.uk/r/PrimeServices
All survey responses will remain anonymous, but should you choose to include your email address at the bottom of the survey you will receive a free PDF of the special report when it is published in September.
There has been a substantial shift in FX prime services over the past two years: some FX prime brokers having been pulling back from the space, prime-of-primes have been expanding to fill the gap and now new firms are coming to market offering potential new solutions to the current credit constraints in the market.
But how will FX prime services evolve from here?
For the Q3 edition of Profit & Loss, we launched a survey to gauge market sentiment regarding this question. It’s not too late to have your say, the survey will close at midnight on July 31st : https://www.surveymonkey.co.uk/r/PrimeServices
Prime brokerage has had an interesting relationship with the FX market – after the initial burst of excitement when it first launched in the late 1990s, the middle years of the first decade of this century saw a growing consensus that it was a good idea that had, had its day.
Generally speaking, PB customers were restricted to dealing on a bilateral basis with the major banks, so while there was undoubtedly some benefit involved, the value proposition wasn’t one that lent itself to continued growth.
Over the past few years, some FX prime brokers have gone from aggressively competing for market share to off-boarding clients and increasing their fees. What happened to make the pendulum swing so dramatically, and is it due for another reversal? Galen Stops reports.
Relatively speaking, it wasn’t all that long ago that banks were aggressively trying to build out their FX prime brokerage (FXPB) businesses and competition was fierce. This precipitated a race to the bottom in terms of fees by some FXPBs. Numerous market sources claim that Morgan Stanley was at the forefront of this race, although they note that a number of major FXPB players were not far behind.
It’s no secret that recent regulatory requirements have put FXPB business models under increased pressure. But some firms also see regulation as an opportunity to change how their businesses operate in order to win new business, as Galen Stops reports.
When questioned about the extent to which a combination of the Basel III regulations and the SNB
event had caused a contraction in the FXPB space, there was some pushback from certain service providers.
“I think that there’s a misperception that there has been a wholesale contraction in the FXPB space,” says John O’Hara, global head of FXPB and FX clearing at Societe Generale.
What are the biggest challenges still facing FXPBs today and how can they be overcome? Galen Stops takes a look.
There’s no getting around the fact that regulation has changed the economics of the FX prime brokerage (FXPB)
business, and not for the better.
“You can classify PB costs into three basic categories – technology, human resources and direct transactional costs,” says Sanjay Madgavkar, global head of FXPB at Citi.
The first two of these are fixed costs that an FXPB has to pay, but the new regulations under Basel III have made it more expensive for banks to provide FXPB services to certain clients, meaning the overall profitability of some portfolios has fundamentally declined.
In a recent survey by Profit & Loss, 29% of respondents cited balance sheet strength as the most important factor when selecting a prime service provider. Meanwhile, 19.9% said that pricing was the most important factor and 14.5% said that the technology available at the prime service provider was the key motivator when selecting a prime.
The product range offered and the existing relationship with the prime provider were both picked as the most important factor by 13% of respondents. Only 3% said that the leverage available is the most vital consideration in a prime service provider. Meanwhile, 7.6% of respondents chose to specify alternative priorities when selecting a prime service provider, and some of their comments are illuminating.
It’s a valid question to ask FXPBs what constitutes a “good” client these days. Post-Basel III, firms taking big positions in non-spot products are going to consume vastly more balance sheet and capital than a firm trading only spot in smaller amounts, which can easily be serviced with a relatively little net open position (NOP).
This obviously suggests that, for example, an HFT deploying a spot-only strategy could potentially be a more attractive business proposition than a large macro fund trading longdated NDFs or options products.
However, speaking to a number of FXPBs, it immediately becomes apparent that such a view is too simplistic. One FXPB head says that this basic analysis is correct, but only assuming a legacy pricing model, which is derived primarily by frequency and size of transaction activity.
“Prime Brokerage Participants should strive to monitor and control trading permissions and credit provision in Real Time at all stages of transactions in a manner consistent with the profile of their activity in the market to reduce risk to all parties.” – Principle 41
Prime Brokerage Participants should strive to develop and/or implement robust control systems that include the timely allocation, monitoring, amendment, and/or termination of credit limits and permissions and adequately manage associated risks.
• Prime Brokerage Clients should strive for Real-Time monitoring of their available lines and permitted transaction types and tenors so that only trades within permitted parameters are executed.
Numerous firms have spotted an opportunity to capitalise on the current credit constraints in the FX market by offering a “prime-of-prime” solution. But what are the different models being operated by these firms and what should market participants be looking at in order to spot the real deal? Galen Stops reports.
It’s no secret that over the past couple of years, some of the biggest FX prime brokers (FXPBs) have been off-boarding
existing clients, while simultaneously raising the bar in terms of the capital requirements for new clients.
But while the willingness of these banks to extend credit has reduced, the need for market participants to access it in order
to trade the FX market has not, as noted in the introduction to this special report.
Profit & Loss talks to John Betts, CEO of Noble Bank International, about the demand for more innovation in FX and the potential impact of a shift towards real-time settlement.
John Betts: The fact that people are not just receptive to innovation but starting to demand it is a really good sign for the industry. I think previously everyone was too focused on the front office, but now there’s a recognition that the back office needs innovation too.
One challenge that I feel still exists, however, is that the back office is not something that’s very well understood, so when solutions are being proposed to back office problems it can be difficult for firms to distinguish between solutions that actually address these problems and ones that are shiny new objects that allow firms to tick an “innovation” box.
So we’ve just published our Q3 edition of Profit & Loss magazine, which includes our prime services special report, and I wanted to share some thoughts about one segment of it.
When I first started the report I was very negative on the prospects for FX prime brokers, over the eighteen months or so I’d heard so many complaints about credit constraints, about offboarding – I don’t think that was even a phrase that I’d heard prior to SNB – and the general retrenchment of FXPBs.
Now obviously SNB was a catalyst for a lot of these issues, but really it just exacerbated a trend that already existed and this was caused by the introduction of new regulations that made it more expensive for banks to offer FXPB services to a lot of clients.
One of the things that makes FX a truly unique market is both its scale and the diversity of the market participants that operate within it. Asset managers, corporates, international banks, regional and mid-tier banks, hedge funds and prop trading firms from all around the world have a real need to access the wholesale FX market.
In many cases though, today, this access occurs via credit intermediaries. This intermediary model places fundamental constraints on the credit available to clients and, subsequently, on the counterparties that they can access.
"Prime-of-Prime" has become something of an umbrella term these days, used by many firms operating very different business models. So Profit & Loss asked a number of firms that place themselves in this category exactly what constitutes a "true" prime-of-prime service provider.