CHF Crisis Heat Pushes Prime Brokers to Increase Trading Costs

Trading costs are believed to be on the rise for currency traders as providers address their associated risks. With the market consolidating and retracting at the banking level, clearing and settlement changes could affect the price retail and institutional traders pay to execute trades.

The move comes as no surprise to participants as the post-2008 recession saw capital increases across the spectrum, thus uplifting transaction fees.

Traders are used to costs and fees when executing trades, both with listed instruments and OTC derivatives. But the recent havoc in the currency markets on the 15th of January has changed the current operating landscape.

Traditional FX prime brokers have responded harshly with a number of providers altering their product offering in light of the incident. Bank of America Merill Lynch (BoAML), a leading US banking institute, is believed to have contacted a number of clients and given them notice, stating that it was reviewing its risk parameters.

Citi, a prominent player in the FX space through its pure FXPB solution and aggregated prime-of-prime solution, is believed to have increased transaction fees. According to Bloomberg, the bank has increased fees by as much as 25% on the back of revised risk measures.

The Forex markets are constantly evolving and the inclusion of CLS, a bank-led initiative to mitigate settlement risk, has given the segment a sense of stability. However, the cost of doing business in the current over-regulated market means essential costs will rise.

The Holland-based ABN AMRO provides prime brokerage solutions while acting as a clearer for forex trades. On it website it describes its clearing product: “ABN AMRO Clearing acts as principal on its clients behalf and extends the credit held with multiple counterparties to them (under ISDA, Master Confirmation Agreement and Credit Support Annex) to support their Speculative, Hedging or Treasury requirements.

"ABN AMRO Clearing includes these OTC FX positions within a client correlated cross-product portfolio margining to generate maximum offset between all OTC and exchanged-traded securities, futures, and derivatives.”

FX Clearing

The current OTC derivatives sector operates in a post-recession arena in which settlement risk and clearing are important components of a trade life cycle.

Clearing and settlement are two vital element in the trade life cycle. They play a key role in global financial markets, particularly as cross-border transactions grow and risk increases. Clearing and settlement takes place after a trade is executed and details of the trade are passed onto a Clearing House which undergoes a process of matching the buyer-seller record and confirms that the counterparties agree to the terms.

The agency reports discrepancies to traders in case the reports do not match, who then try and resolve them. After the clearing process is performed, through settlement, agencies fulfil the delivery requirements of the securities. The settlement agency receives cash from buyers and securities from sellers and, at the end of the process, gives the securities to the buyer and the cash to the seller. Agencies perform an important function in case a trader is not trustworthy or creditworthy.

LCH Clearnet and CME both offer clearing for multi-forex instruments including swaps and NDFs.

Apart from clearing costs, currency brokers are facing an uphill struggle in setting up bank accounts that entitle them to hold client funds. Under the FCA's rules, firms that are able to hold client money must hold them in a banking institute that has the correct permissions. In addition, the bank provides the firm a trust or client acknowledgement letter to adhere to the FCA CASS 7 rule book.

Furthermore, FXPBs have raised the bar for retail and institutional forex brokers in light of Basel III updates and the credit risks associated with leveraged instruments. Major banks are believed to have queues stretching four to five months for new clients that need to be on-boarded.