Shockwaves of CHF Crisis Impact Foreign Exchange Prime Brokers

The contracting FXPB sector has been directly affected by the recent turmoil that hit the Swiss foreign exchange market. Forex Magnates learned that some providers have altered their arrangements with users. Additionally, the move had significant impact on certain clients as the banks re-examined their risk protocols and went as far as terminating certain PB relationships. Thus signifying the fragile nature of the global banking sector.

Credit risk has been a key driver of change in the Foreign Exchange Prime Brokerage market, after gaining some traction post-collapse of Lehman and AIG, the sector has once again entered difficult territory. Bank of America Merrill Lynch, a leading US bank issued notice to certain clients, informing them that they were unable to continue doing business with the firm, a source familiar with the matter stated to Forex Magnates. Barclays is also believed to have been on the wrong side of the dilemma and is reviewing its PB services, thus affecting its users.

Among other major banks, Citigroup's prime services has also been affected by the franc volatility. Providing prime brokerage services to many of the larger retail forex brokers, Alpari UK is a client of their, with the broker's insolvency possibly causing Citi to take a loss on the relationship.

BoAML and Citi both declined to comment.

The FXPB space has seen a number of providers alter their offerings with banks, either integrating the FX desk into the main prime brokerage offering or banks completely distancing themselves from the forex PB markets. SEB, Rabobank and Commerzbank reported that they were exiting the market in 2014.

The change in practise has created a new opportunity for tier-2 providers and aggregators that have relationships with prime brokers and offer their credit lines and Liquidity relationships to other clients. The Prime of Prime sector has seen a sharp rise in the number of providers offering prime capabilities to users that find it difficult meeting the requirements of banks.

FXPB services are used by hedge funds, banks, asset management firms and retail forex brokers. The product has evolved significantly over the years, and the once restricted, VIP, hedge fund-only solution, opened its doors to new participants as users’ needs changed.

A prime broker allows a trading firm to access liquidity and execution capabilities to several counterparties, under the single bank relationship.

PBs offer credit intermediation for over-the-counter transactions which are given up by other banks and executing brokers. In addition, the bank can provide multiple asset classes, including futures, equities and fixed income products, with the ability to cross-margin and have end of day reporting of positions.