How does fx prime brokerage work

A smaller FX trading firm with fewer counterparties is not going to get much operational efficiency from an FX prime brokerage set up. Initial margin savings will also be smaller as the benefits from a portfolio margining-type of platform are limited. JPMorgan investor services already provides cross-margining between bilaterally traded FX cash products and futures products by margining based on a holistic risk profile of the client. When FX clearing of non-deliverable forwards and FX OTC options becomes a reality, Mr Choussy believes that the infrastructure that the bank has built will allow it to provide an integrated cross-margining platform.

Although an established player of 10 years, Newedge came to FX prime brokerage from the listed derivatives market, so at first its clients were largely commodity trading advisors acting on behalf of other clients, and then global macro funds, and now are full-service prime brokerage clients. As the biggest listed derivatives house, Newedge knows centrally cleared technology well and, in a sense, the FX market is coming towards Newedge.

Because we were a little later to the game compared with some of our competitors, we were able to build [our offering] on an integrated platform, and have had a single client-facing platform from day one and have not had to re-engineer our platform greatly since. FX prime brokerage can be offered as a standalone service but Mr Waterworth says Newedge aims to cross-sell and cross-margin the execution and clearing offerings to maximise the benefits to both the client and the broker.

He says that new regulatory requirements have come at a time when there is almost a perfect storm in FX — fees, regulatory capital and the cost of business are going up amid decreasing volumes.

Mandatory clearing is just one strand of the changes facing the market. He believes the biggest casualties of the retrenchment of prime brokers from the wholesale market in the past 12 to 18 months have been institutions using white-labelled services from the larger prime brokers.

For Mr Waterworth, FX prime brokerage is already part of a cross-asset offering and this will strengthen, which is why Newedge has invested significantly in its full-service execution, clearing and prime brokerage , multi-asset platform in the past five years.

There is little doubt that the tightening up of credit allocation by prime brokers has enabled the prime of primes to grow their market share by providing credit services to smaller firms, a trend that was only enhanced by the spate of recent exits from the market.

Saxo Bank built its FX prime brokerage business 18 months ago. Peter Plester, head of FX prime brokerage, who recently joined Saxo Bank from Rabobank, says the decision was made to enter the market because it had evolved and the days of a single liquidity provider have gone.

Mr Plester says that this specialisation in FX has led Saxo to develop a unique prime of prime model. Once an account is opened, the client can choose to use Saxo as a liquidity provider, a clearer of single bank liquidity providers or electronic communication networks, or use the Saxo account to cross-margin against options, contracts for difference CFDs or commodities.

With the larger FX prime brokers raising the bar to entry, and smaller market participants searching for brokerage services, Mr Plester believes that the growth in the market will come from the prime of prime model. This lends itself to a more tailored and personalised service and one more like a private banking service. With its strong focus on technology, Lars Holst, co-founder and chief executive of CFH Clearing, says that CFH re-launched a year ago to emphasise its prime of prime and clearing services.

Just having the balance sheet can only take you so far, but to have scale in your business you need the technology as well. CFH Clearing builds trading infrastructure for banks and brokers, and emphasises that it can give access to any liquidity source and any prime broker, clearing tickets from the interbank market and connecting the primary market to the institutions.

While CFH Clearing is seeing new entrants that want to get to market faster, Mr Holst says the prime of prime offering is also picking up business from prime brokers exiting the market or tightening up their on-boarding requirements.

As CFH Clearing operates fully automated no-touch systems, it is less concerned with the number of tickets a new customer is expected to clear daily than some prime brokers might be. Already this year, CFH Clearing has cleared the same volume that it handled throughout It is no longer enough to have a strong balance sheet — it is about technology and scale.

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Bank of America. BNP Paribas. Citadel Securities. Algorithmic execution is essential and very much a talking point in FX circles. It is clear that this is a significant target for technology investment. Within the program trading community, profit margins are finely tuned and as such, cost of execution is an integral part of the program itself.

The knock on effect of all this competition is that banks are now turning to address their processing cost bases. Traditional FX Operational structures are creaking under the weight of ticket volumes and therefore technology is once more required to solve the issue. Netting services to reduce tickets numbers sent to operating systems are being employed to reduce overhead and operating friction. This is in its infancy, so there is still some way to go, however firms such as Traiana and EBS ICAP have developed this capability and the CLS Bank, clearing mechanism for interbank settlements , are reportedly working toward a netting solution.

The impact will be enormous in terms of operating costs and risk. Competition among FX prime brokers to secure the highest volume program traders is intense such that fees have plummeted for this particular client segment. In simple terms, the FX market is much more accessible and spreads are tighter than ever. This is great news for the currency manager or program trader that is highly specialised and singularly focused on a particular segment.

Most other managers however run complicated businesses and therefore require greater levels of service. As most full service prime brokers know, you need to be able to service the client at multiple levels. That means satisfying everyone from the CEO to the IT department, even down to the client administrators. Everyone within the client organisation has a say in whether the prime broker is delivering a top level service.

So what does it mean to be all things to all people? Not all clients are cross-product in nature, so first of all it is essential to be best in class in each product discipline. For my part I have to be the number 1 service provider of FX prime brokerage services.