The epic world of Foreign Exchange Prime Brokerage has faced its biggest challenge since the demise of Lehman’s and AIG. In the current climate, PBs are raising the bar with credit, Basel III and onslaught of a low-volatile trading environment impacting the sector.
Ben Brown, Head of FX at Velocity Trade, a London regulated FX provider, shares his insight on the formidable topic of PBs and their young brother (that’s getting a few inches taller!), the Prime of Prime (PoP) segment.
Before we get into the nitty-gritty, we asked Mr Brown his views on the current climate.
1) How is the current low volatility impacting your business?
Unfortunately like everyone out there, volumes remain static to down. I think we may have fared better than most with volumes only really taking around a 10-15 percent hit, but that is largely due to the diversified nature of the customer base. That being said our corporate and institutional deliverable business continues to grow at rates in excess of 35% reflecting both the value we offer and our growing international capabilities.
2) No surprises there! lets move onto the world of Prime Broking, a recent influx of activity has shaken up the sector, namely at Rabobank & SEB but we’ve also seen some changes at BoAML, what’s your thoughts?
I think it shows how costs and the pricing of risk has been somewhat incorrect and therefore was inevitable. The shakeout allows others to come to the fore and I think PoP and clearing services at our level remains a growth area.
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3) It’s interesting that you mention incorrect pricing, at banking institutes where there’s modelling and forecasting for absolutely anything, we won’t mention who was to blame! The PB offering has been around for a while, do you think the 2008 recession put FXPB in a turmoil?
In so far as the change in rules, coupled with a more recent and notable decline in volumes, the value of a PB relationship comes under more scrutiny from the provider. As for being in turmoil, I don’t necessarily agree with that, last year’s Dodd-Frank and this year’s EMIR naturally slows things down and creates a little of the unknown and a therefore an extended period of stagnation. But as the Venerable Paul Weller once penned, ‘This is the Modern World’ and regulation has changed, no one PB is unique in this situation.
4) With bank and non-banking providers having similar offerings, in your opinion,what are the two most important things when searching for a PB?
In my personal opinion, Service and Support, it’s a fairly basic equation, at the near end of the business’ growth cost becomes less important (within reason). Primarily the questions we asked ourselves at Velocity Trade before choosing a provider were; ‘how are we going to expand our business within the PBs framework and what support will we get in the expansion phases’?
Naturally that has a cost, it’s all very well seeing sub 1 USD per million fees but what support do you get when initial monthly volumes are low? In the current FXPB world of agency, 4 way agreements messaging and risk, for Velocity Trade as a company to compete, we need to know that these often legally mired set ups are quick and precise, stagnation of this process creates a potential loss of revenue that at our level is more amplified than perhaps the potential loss of revenue at the PB
5) I was certain 4 way give ups were going to be mentioned! One customer segment that uses the services of PBs more than anyone are Hedge Funds, what are the challenges mid-size hedge funds and firms face when dealing with a PB?
Primarily, Risk and Value, the days of an open-book to multi-venues is diminishing, multi-venues being harder to manage on a risk basis and therefore costs rise, notwithstanding new core capital rules, Dodd-Frank and EMIR.
Tier-one PBs now look more closely at their deployment of capital and the inherent return on that capital. PB fees are in the ascendency making the barriers to entry harder for the smaller firms.