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.
One respondent said that they look for a “provider who recognises the model will likely change in the near future (ie, being open minded in sponsoring industry efforts around voluntary clearing for OTC products)”.
A number of respondents found it difficult to pinpoint one factor, with one person at a Chicago-based trading firm stating that their decision would be based on the “balance between amount of cash needed to deposit with PB, pricing, technology and existing relationships”.
Meanwhile, a prime-of-prime respondent stated: “With our clients, it’s a mix of all of the above depending on the underlying client business – prop/hedge fund or broker. As a client, I would argue the same when selecting which PBs we work with.”
Another respondent at a European principal trading firm said that, “being able to do Designations Notices (DNs), three-ways, four-ways and credit carve outs” was the most important factor. Consistency is another theme that emerged in some of these comments, both in terms of the technology, finances and operations of the prime service provider and in terms of their commitment to remain in the FXPB space.
Speaking to sources at trading firms that utilise FXPB services, the importance of relationships is emphasised much more than in the survey results.
“Relationships are paramount across the board,” insists a senior figure at one US trading firm. “An FXPB may have a monthly minimum that you’re not hitting, but they’re willing to subsidise that because of the relationship and the long-term trajectory of the business. The real winners in this game will be the firms that can see the scalability of a client, while understanding their risk and how their strategy operates over a given time frame. If someone ever tells me that I’m below a set tier and they’re thinking of cutting me off from that service and then they point to a grid or chart – that’s not someone that I ever want to trade with.”
The head of e-FX at another trading firm agrees with the survey results that credit worthiness and balance sheet are the first consideration when selecting an FXPB. Their second consideration, they say, is infrastructure. The source says they want to know which counterparties they will be able to trade with via that FXPB, what their technology is like and what type of credit checks they adhere to before signing up with an FXPB.
Interestingly, one source stresses that FXPB fees are actually one of their lowest priorities when choosing which banks to partner with.
“I honestly think we’re getting to a world where the fees are becoming the lowest priority. When we sign a brokerage agreement, fees are the last thing we look at. Pay brokerage, let them be happy, negotiate later,” the source says.