The forex market is on the verge of a dramatic transformation-one that could mark the death of the interbank market as we know it-or so say some industry sources. The change would put customers on par with the banks, using the same electronic broking services that have nearly obliterated FX spot brokers and changed the way that banks themselves operate.
Since their introduction seven years ago, EBS and Reuters officials have always said that their anonymous electronic matching services were designed for the banks and that there were no plans to make these available to the corporate market. Afterall, EBS was created by a partnership of the world’s largest banks to combat what they saw as high brokerage costs and Reuters’ potential stranglehold on the market, not to cut themselves out of their own business.
But, as we’ve seen, electronic matching has taken on a dynamic all its own. Not only has it cut into brokers’ business – but it has squeezed the margins that the big international banks derive from their smaller regional bank customers by levelling the playing field.
But now, some industry participants are saying they want the matching service to be available to their customers. Sources say, however, that EBS members are resistant to such a move – and, according to an EBS source, there are “absolutely no plans whatsoever to provide EBS data to bank customers”.
EBS is a partnership, therefore, any decisions that affect it require unanimity among all 14 of its members: ABN Amro, BankAmerica, Barclays, Chase Manhattan, Citi, Commerzbank, Credit Suisse First Boston, JP Morgan, Lehman Brothers, HSBC Midland, NatWest, S-E Banken, UBS and the Minex Corporation.
Since January, sources say that members of the UK’s FX Joint Standing Committee (which advises the Bank of England on market-related issues) have been reviewing the changes that have taken place in the interbank market – from the introduction of the euro, to the curtailment of interbank trading and the potential impact of letting corporates have access to EBS.
These sources say that by the end of this year, they expect corporates may be allowed to see EBS prices – a move they say would be a precursor to allowing them onto the service.
But first there are some major obstacles to overcome. While only the largest trading corporates would be able to absorb the monthly price tag, which sources say can run as high as $1,000/month per keystation, they would still be subject to credit. “Issues such as administering credit become very important, and a lot of companies are not set up to handle this,” says a source in New York.
So what does this mean for the interbank market? Well, some sources say the interbank market is very close to death – if not dead already – so the addition of the trading corporates will bring much needed liquidity into the market.
“Corporates are very expensive to service – and some are demanding such tight pricing that we’re not making any money. If corporates become more transparent, it will be good because the big banks won’t have the upper hand on this activity – there will be a lot more transparency,” says an FX manager in London.
“Banks like Citi, which make their living from their retail franchise, will be against a move like this, but I don’t think they’re going to have a choice because a lot of banks are starved of liquidity,” says another London-based FX manager.
But not everyone thinks corporates will bring liquidity to the interbank market. According to one market official, “Unless banks are prepared to put more bids and offers in, the addition of corporates is not going to help liquidity. Besides, not that many corporates trade actively enough for it to help overcome liquidity problems anyway,” the London manager adds.
“Corporates do not typically add liquidity or make markets. Right now, prices are so tight that corporates still have a lot more to gain from us through value-added services and risk undertaking than they do from better pricing,” adds a manager in New York.
This is something that’s being considered, says another FX manager in New York. “Most EBS banks are resistant, but you can’t stop the flood of technology. Personally, I think that right now, it would create more problems than it would solve, but eventually, FX is going to move completely to screen-based trading, so it may just be postponing the inevitable,” the manager says.
The days when we quoted each other are over, adds another source. “We don’t tend to trade interbank much anymore because there’s no liquidity there,” the source says. “It’s more efficient to use EBS and Reuters. We’d probably pull out of the interbank market altogether, but we don’t want to be the first. What is likely to happen is that a group of banks will pull out together.”
According to one source, Citi London has already pulled out of the spot Swiss franc market, and says that there are rumours that it is planning to pull out altogether if it hasn’t done so already. “It’s impossible to tell if Citi has pulled out already, because hardly anything goes through the interbank market anymore,” says the source.
“I think that a bank like Citi – which is the last bank on the planet that fully staffs every centre – is now realising that it’s not necessary anymore. I think the merger with Salomon Smith Barney showed them that they don’t need 25 traders to do the work that three can do – it doesn’t make sense to carry all that extra weight,” says another source.
The old Citi model bases itself on having a steady flow of captive retail business, this source says. “Mergers get you to re-evaluate your mission and take a hard look at your efficiencies on the desk. Citi probably would have carried on, but the merger is getting them to change their ways quicker than they may have otherwise,” the source adds.
Some industry players say that talk of pulling out is pointless. “I don’t think that banks need to make a stand, announcing that they’re exiting the interbank market. If they don’t want to be in the interbank market, then don’t call and don’t quote. I think you can do it, because no one uses the interbank market like they used to. I can make all of this trading room’s spot prices from a single seat during the busiest trading hours of the day,” says a source in New York.
Other sources say Citi London is said to be considering getting rid of Reuters Dealing 2000-2 because most of its business is transacted on EBS. “I think that eliminating one would be very damaging to their reputation,” says a source. “Any bank that’s considering this needs a contingency plan in case you need to warehouse risk. You will find yourself at a competitive disadvantage if you are dependent on only one means of liquidity when the markets start acting silly.”
“I think that people considering such a move are getting ahead of themselves-it’s not a big selling point for anyone,” this source adds.
There is another element to this as well. Companies like Cognotec and Tibco are making a living from building dealing systems that link banks with their customers. If customers can see the same prices as the banks, “well, you don’t need to be a genius to figure it out”, says one dealer.
John Beckert, president of Cognotec Americas, says he doesn’t believe that it would ever be in the interest of EBS’s member banks to let corporates see these prices. But if this does happen, Beckert says, “I don’t think it would have negative implications for us – the majority of our deals come from below the top 100 corporates – the potential negative impact would be for the industry at large.”
Another forex manager echoes this view – saying the FX market needs to readdress the situation. “Should we allow corporates access to these screen-based services? I think what we really need to be doing is encouraging direct dealing relationships again,” the manager says.
So is this the end for FX? “Not at all,” says an FX manager, “FX is a commodity. It has been very volatile for many years, but as we lose currencies, there is more emphasis on value-added, structured products. If one trader can quote 10 currencies, we become low cost because we don’t need 125 spot traders around the world quoting prices – we can get away with one-half or one-third of these.”
With the crisis in the Asian currencies sapping market liquidity, and the ongoing banking sector consolidation continuing to take a toll on turnover generally, Julie Ros asks market participants in Singapore how the city-state is weathering the storm.