The evolving FX prime brokerage industry

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FX prime brokerages sticking to their core offerings

Despite the significant opportunity, some are yet to see the demand for multi-asset class coverage well catered for within the prime brokerage world. “We have found a truly integrated multi-asset class PB offering quite rare, especially among our panel of Tier-1 PBs,” says James Alexander, Chief Commercial Officer at 26 Degrees, the Australia-based FXPB,“we have heard lots of talk but we are yet to really see it.”

Instead, many of the Tier-1 brokers are going back to their core offerings, says Alexander. This is partly a strategic decision with T1 PBs becoming more selective about clients and some of it is technical, in that they are not willing or able to integrate the different systems and platforms that have historically been used for different asset classes.

“We are not seeing that consolidated multi-asset trading platform or pricing engine and it is surprising because the client demand is there,” says Alexander. “There are technology challenges. For the very large PBs, it is a risk to integrate a new asset class into their legacy infrastructure and, at the moment, the risk appetite is not there.”

However, the risk aversion among the tier 1s is a huge opportunity for prime of primes (PoPs), believes Alexander, “Especially those that are willing and able to provide best in class third-party infrastructure solutions that will enable the widespread use of APIs rather than relying on existing internal systems. This is where a prime of prime such as 26 Degrees can potentially add significant value to clients seeking that truly integrated, multi-asset solution.”

“Firms that are willing to engage third-party vendor solutions will find it easier to extend their asset class coverage more quickly,” says Alexander. “There has been a real dearth of technology advancement and resources in recent years which has hampered banks’ efforts to retool their legacy systems. Interestingly, a lot of fintechs have shed staff over the last year so that may enable the Tier-1’s to recruit more specialist technology resources, which also continues to be a key focus of our own talent acquisition plans.”

Another trend that continues to play out, says Alexander, is the demand from prime broker’s clients for greater use of APIs to streamline workflows, “This is especially important for those firms that need to aggregate a number of different PBs to achieve access to multiple asset classes. It is essential for the PBs of the future to offer a more efficient suite of APIs, not just for pricing and execution, but for risk management, credit management and numerous other operational processes. APIs done well can provide a client a singular view and ease of automated reconciliation, allowing them to streamline operational and risk-based workflows in real-time. Prime brokers that can support feature rich API solutions will grow and thrive, especially at a time when there are significant risks in relying on a single prime brokerage partner,” says Alexander.

Increasing global access

The other area where PBs have focused is extending global access, particularly to markets like China where many of the T1 PBs have pushed heavily with their Equity Swap solutions. However, as Alexander notes, it remains to be seen what the appetite looks like among the tier 1 PBs to continue to support managers from this part of the world, Hong Kong in particular. With our headquarters in APAC, 26 Degrees remains committed to both providing access to Asian markets and supporting APAC based managers and broker dealers.

The recent changes in market conditions have strengthened the proposition of FXPBs, says Alexander, at least for those FXPBs that have shown a willingness to be more flexible. “It is a question of efficiency,” he says. “If an FXPB can be more accommodating and flexible in how they apply pricing and margining methodologies, they will serve their clients well. And the premium that clients are willing to pay for ancillary services is actually quite high right now. With the volatility in the FX market, there is the opportunity for greater profitability, especially for the FX participants that have partnered with the right FXPB,” states Alexander.