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F X P R I M E B R O K E R A G E
a big question about the viability of the FX
T he phenomenal growth in FX prime Cross-asset prime brokerage
brokerage in just five years, fuelled by prime brokerage offering as less than 1% Cross-asset capabilities are the core of
the transformation of the FX market by of the daily dealer to client volume was JPMorgan's prime brokerage offering.
electronic trading and the increased FX prime brokerage. Fast forward five Almost three years ago, all prime
liquidity provided by FX ECNs, is very years and every major participant in the brokerage services were brought together
much down to the hedge funds and the market is offering FX prime brokerage in a single platform covering FX, interest
simple fact that FX is now traded as an and now we estimate that a quarter of the rate and credit derivatives, commodities,
asset class in its own right. While there is daily volume is FX prime brokerage.” and securities. Even more ambitious was
no doubt that banks sold prime brokerage
the firm's decision to run the business as
in the early days in order to boost FX Importance of Hedge Funds a single global unit, with 24 hour
volumes and increase margins, today, the
According to Mandelzis the growth has coverage across North America, Europe,
focus has very much changed and it is not
been driven by hedge fund participation, and Asia.
FX margins they are chasing so much as
and the fact that hedge funds started
the bigger prize of a guaranteed revenue
trading FX as an asset class. Then the e-
stream by processing as a prime broker.
The pitch has also changed. In the early revolution, both in terms of the banks that
days FX prime brokerage was a heavily have invested in e-commerce, price-
manual process with no standards for streaming capabilities for their own single
give-ups agreements and FX prime bank portals, as well as massive growth in
brokers had to invest in staff. Today, the the ECN activity added to this. He says:
pitch is very much about connectivity, “As a lot of the ECNs require a prime
market access and the greater efficiency broker to participate this pushed the
gained through automation and straight market even more. The entry of a new
through processing and commitment is breed of traders – the algorithmic traders,
measured in technology investment. further drove FX prime brokerage.
Automating and bringing processing Dave Olsen
costs down have been key and are even
more important now as competition has Dave Olsen, global head of prime
increased and influenced the margins and brokerage marketing at JPMorgan says:
the pricing.” "Based on feedback from our clients, we
decided to create a single business line
He also thinks that further growth will for prime brokerage across all traditional
come from prime brokers offering prime boundaries. For many hedge funds, FX
brokerage to other kinds of clients such as prime brokerage is becoming increasingly
By Frances Maquire traditional fund managers and money linked with other liquid markets,
managers, which will escalate over the particularly interest rate derivatives,
FX prime brokerage as a mainstream service has new few years. government bonds, and related futures
expanded beyond the hedge fund world to Gil Mandelzis contracts; our ability to intermediate
embrace all client types who are recognising the But for now, Mandelzis says that banks these risks and support them with a single
Gil Mandelzis, CEO of Traiana, says: “Four are trying to differentiate by extending team is a key element of value in our
benefits it can bring to their business. It's recently
or five years ago, the genesis of modern services to smaller funds and offering relationship."
become an increasingly competitive arena, with
FX prime brokerage, it was a niche service back office processing and hedge fund
clients demanding more effective reporting, provided to a very select number of administration to add value as well as Olsen believes that another compelling
increased account control and robust automation, clients. It was a very manual, high-touch investing in sophisticated reporting to the element of JPMorgan's strategy is its
Frances Maquire finding it harder to differentiate amongst providers. process, with few players. There was even larger funds. development of risk-based margining. If a
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Raising the bar - what's prompting change in the foreign exchange Prime Brokerage business?
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F X P R I M E B R O K E R A G E
client has FX, interest rate derivatives, Many funds that had previously focused closely at the understanding of, and
government repo, or futures exposures, on single strategies are expanding their commitment to, the sector as it is
JPMorgan pulls all risks into the same footprint in the market to include FX as imperative that a prime broker cannot
model to determine the correct amount of part of a multi-strat profile. The liquidity only support existing requirements, but is
margin to collect on the portfolio based and transparency provided by the ECNs committed to staying on the leading edge
on the inherent offsets that might exist has also fuelled growth in the FX market, of innovation. For example, says Duff,
across markets. he adds. “The additional electronic access points
For clients that are more focused on pure along with expansion into additional
FX strategies, JPMorgan is betting its Focus on differentiation
asset classes have provided ample
best-in-class technology will help them Prime broker, RBS Greenwich Capital,
opportunity for prime brokers to
continue to gain share in a competitive currently supports FX, interest rate
differentiate in a market space considered
market. Says Olsen: "This business is derivatives and futures under a single
Brian Duff by many to be commoditised.”
about scale, not only to meet the capacity umbrella while actively engaging in
demands of our clients, but also to put us expanding capabilities to credit
He also adds that technology and
derivatives and other over the counter technical nuances of the available ECN’s
in a position to be a low-cost provider.
and liquidity pools. We don’t just plug-in automation, capital efficiencies, cross-
The advantages of a straight through (OTC) products, and has built a strong
clients but work to establish highly efficient margining, and a high level of it has an extensive balance sheet with the technologies and workflows. Releases are
processing model are multiple: we can quantitative research and an advisory
solutions for each client. In addition to responsiveness are always in demand from ability to provide credit lines to facilitate scheduled every quarter and future releases
process higher volumes with less service on technical set-up and support.
technical expertise, we are focused on prime brokerage clients, and while most trading via any counterparties or channels, will add new reports and distribution
operational risk at a lower marginal cost."
understanding each client’s strategies in managers do have strong interest in capital the ability to be a wholesale trading, mechanisms, continued enhancements to
Brian Duff, head of prime brokerage,
order to advise the alternatives best suited introductions, if the prime brokerage settlement and clearing provider for clients its give-up straight through processes and
In the past year, JPMorgan has rolled out North America, at RBS Greenwich Capital,
to the clients needs. This expertise comes product and service is not of a high and banks, as well as continued investment new services for post trade management
a number of products that provide true says: “Our focus on differentiation is
from the substantial experience of the standard, it is not sustainable. Likewise, in technology and high quality global and position rolling.
real-time reconciliation for FX so clients geared towards automation, capital
members of our prime brokerage team.” while algorithmic trading has had a major service personnel.”
know exactly what their position is as well efficiency, and customer service. It is
paramount to have 24-hour, global in- impact on the FXPB space and the Says Graham: “UBS is leading the way in
as the P&L they have generated to that
house technical expertise and support. Duff believes that clients assessing a subsequent volume explosion on rate offering prime brokerage across asset
precise moment. Olsen says "A lot of our
We are also highly focused on the prime brokerage offering should look compression, regardless of the rate, the classes. We work with our clients to
clients have embraced this technology to
business is not sustainable without provide them with the exact level of cross-
ensure they are never out of sync with
significant capabilities. According to Duff product facilities they require. Capital
what we believe their position to be.
“Further growth in our FX prime brokerage introduction continues to be important as
Control and confidence are paramount to
all clients, but especially to the will come from both leveraging our existing investors seek to increase exposure to FX
algorithmic traders. Because of the capabilities, and additional products, as an asset class, but currently clients
sophistication and speed of their models, services and technology. In-house expertise seem to be most focused on efficiency
mistakes can have severe consequences, and staff will always be the key gains, operational risk reduction and cost
and our ability to provide immediate differentiator in prime brokerage offerings.” controls. We have worked with our clients
reconciliation 24 hours a day means our to significantly automate their trading,
Devin Graham
clients can mitigate any errors at their Selecting a provider. clearing and reconciliation process. As a
point of origin." Devin Graham, head of FX prime brokerage All of UBS’s FX prime brokerage services result clients know their up to the minute
at UBS, says: “First and foremost a client are developed in house and constantly portfolio exposure and can reduce the
Olsen is in no doubt that the biggest must realise they are not just selecting a enhanced in line with clients' requests. manual overhead associated with trade
driver of growth for FX prime brokerage provider but they are selecting a partner Recently UBS has made a variety of processing.”
has been the increasing number of funds and as such, a partner must be evaluated enhancements to its reporting services as
developing FX as a strategy, not just a on its demonstrated commitment to being well as expanding its give-up services to He believes there are a great number of
support function for other global activity. a market leading liquidity provider, whether support a wider variety of client growth opportunities for FXPB services,
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F X P R I M E B R O K E R A G E
as more and more clients are starting to The improved straight through processing operational and market risk. Clients are Penson’s Quantitative Execution Group
realise the benefit of utilising prime frees up prime brokers to focus on always presenting new challenges to us, offers international multi-asset, multi-
bespoke services as well as enabling so there is never a lack of opportunity to currency, algorithm advisory and
brokerage services and processes. While
execution services together with our
hedge fund activity continues to increase, Citigroup to better service clients, simply differentiate ourselves.”
multi-asset, multi-currency custody and
other markets are opening up. However, due to the fact that the faster trades are
clearing services. It can enable cross-
Graham believes that competition is given-up, the better the position the prime
product margining of equities, options,
increased and that only the prime brokers broker is in the reduce the client’s market
and bonds and has capabilities to offer
that have sound scalable services now are risk exposure. Says Coyne: “Each client is
cross-risk management of futures. It also
in the position to invest to offer services different. There are some clients that this plans to offer premium alpha research to
to this growing market. is simple enough and electronic enough select customers.
that it is fed into the service, although we
have great many clients who have Says Slade: “It appears as if continued
complex clients and what we are doing competition and regulation in the equity
with them is managing their potential markets has generated buy-side interest in
market risk exposure and what we do is The same IT development team has built The recent moves in FX prime brokerage more lightly-regulated asset classes and in
critical to making sure that their trades are Dresdner Kleinwort’s full cross-product, is prompting Penson, a full service less-regulated countries both of which
Roger Allen cross-margining prime brokerage system firm for multi-asset, multi-currency play into Penson’s current offering. Our
matched and handled correctly.”
so that there is true compatibility for multi- international clearing, custody and vision is to create a premier global multi-
Developing bespoke services asset class clients facilitating efficient trading to offer a limited direct prime asset, multi-currency execution, prime
According to Coyne, algorithmic trading
For Roger Allen, director of foreign collateral management. This enables brokerage offering to its FX customers. brokerage, clearing and custody firm. We
has grown on the back of FX e-commerce Dresdner Kleinwort to offer full cross-
exchange prime brokerage at Dresdner have made significant strides in seeking
and has taken off because prime brokerage product, cross-margining capability and
Kleinwort, the fact that its FX prime that goal and hope to leverage our
allows access to any given liquidity pool. reporting.
brokerage service has been built by its technology prowess and customer service
Andy Coyne This has given algorithmic traders the
own IT developers, in response to client to win large institutional customers who
opportunity to get as much access to as Says Allen: “We offer all-in pricing for PB
Connectivity to liquidity requests, has given Dresdner Kleinwort demand a higher level of service.”
much liquidity as they require. But he and ECN fees, online reporting tools with
the flexibility to develop bespoke services
Citigroup developed its FX Prime Brokerage real time price feeds, credit utilisations and
believes this style of trading is not an issue Conclusion
as there are no legacy systems restricting option volatility surfaces. Highlights within
desk more than six years ago. The desk for prime brokers, as, despite the sheer its flexibility. PB are cross-product margining, Financing Traiana’s Mandelzis maintains that FX
primarily services hedge funds but ticket volume, the trades tend to be highly
and Securities Management and our highly prime brokerage is now a business that is
Citigroup has other clients such as financial automated. The only potential issue is one He says: “We are constantly improving our automated and flexible FXPB platform. essential to any FX player because of the
intermediaries and users of other foreign of processing capacity and associated FXPB platform in response to clients’ Clients appreciate the real time information massive volume and because hedge
exchange services, as a direct result of the costs, which need to fall across the demands and suggestions, as well as our available on our FXPB interface such as funds are so important today. “The hedge
growth in e-commerce and ECN platforms. industry. He says: “We have a lot of ideas own enhancements. This flexibility is positions with revaluations, credit funds are taking such a huge market
According to Andrew Coyne, head of FX entirely due to us retaining full control Morgan Slade
around using technology to improve and utilisations, display of executing brokers.” share and their vehicle to participate in
prime brokerage at Citigroup, although over our in-house developed systems.” the market is prime brokerage. The
differentiate our offering around
prime brokerage gives users access to Going beyond traditional client base Morgan Slade, vice president of Penson growth in FX prime brokerage has
liquidity and credit, it is really about and director of the Quantitative Execution exceeded the expectations of every
According to Allen, going beyond the
connectivity to liquidity as well as trade Group, says: “Increased competition in participant in the market.” Mandelzis
traditional client base provides a huge
flows and workflow. hedge funds has really driven people to believes there will be continued growth in
array of opportunities for clients to gain
access to better credit, better liquidity and
stray from their typical areas of looking electronic trading and a focus on lowering
Coyne says: “A number of years ago FX reporting functionalities. He says: for alpha with more equity traders trading costs through further automation. Part of
“Dresdner Kleinwort’s cross-product, FX. We have access to many of the top the competition is about getting the costs
prime brokerage changed from being
cross-margining PB service suits an liquidity pools for FX trading and have right but, he says, a bigger issue is
manually driven product to an electronically
increasing number of clients who benefit trading relationships with many banks. growing around capacity. “A number of
driven one – more efficiencies, more
from the collateral efficiency this We do not offer a traditional prime banks are starting to be concerned about
electronic products and ECNs helped drive
generates. As the e-FX world continues to brokerage product yet but hope to add their capacity as the volumes continue to
volume. The most dramatic boost to the
capture increasing market share, it will be that in the future.” grow dramatically. A large prime broker
prime brokerage market in recent years has was doing hundreds of daily transactions,
important to continually develop the
been the development of the Traiana scope of automation to liberate more He believes the key differentiators in FX but in a couple of years that will be tens of
automatic give-up systems and the resources for improved client service in prime brokerage continue to be flexibility, thousands a day. That has implications for
introduction of real-time matching.” areas where human interaction is valued.” technology and customer service. the downstream systems.”
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