LeapRate Exclusive Interview… When Marco Baggioli (pictured above) left his position as Global Head of FX Prime Brokerage at French bank BNP Paribas SA (EPA:BNP) in early 2015 to be COO of the new London office of Abu Dhabi based ADS Securities, he certainly knew that he was beginning a new adventure and new chapter in his career, which has also included senior FX roles at Deutsche Bank AG (FRA:DBK), JPMorgan Chase & Co. (NYSE:JPM), and the Merrill Lynch brokerage unit of Bank of America Corp (NYSE:BAC).
But he might not have realized that less than two years in he would be based at head office in the UAE, overseeing some major changes and restructuring at ADS as the company’s Executive Managing Director and Global Head of Brokerage.
What changes is ADS Securities making to its global operations? And why?
How will the FCA’s new proposed rules on leverage and bonuses affect ADS’s business?
What can we expect to see next from ADS?
We’re pleased to speak today with Marco, who explains all this and more.
LR: Hi Marco, and thanks so much for joining us today. We understand that you’ve instituted some significant changes at ADS since you took over the Executive MD – Global Brokerage role in the summer. Can you please elaborate on the key changes, and why you have made them?
Marco: We operate in a very dynamic industry where you have to be flexible and react quickly to a range of factors including new regulation, higher capital requirements and a rapidly changing political landscape. In 2016, some of the largest firms we compete against have had to take unprecedented measures, at an unprecedented pace.
At ADS Securities, we acted early to restructure and align our business to the new realities of the market. One of the major moves has been to centralise our operations out of Abu Dhabi which has allowed us to reduce costs and increase efficiency in offices like London and Hong Kong. We have also streamlined our Back, Middle and Front office functions to become more agile, global and create greater economies of scale.
Faced with the FCA’s announcement of its review into spread betting and CFDs, which will put further pressures on the UK market, this was a very sensible move. In fact, in the last few days one large brokers has announced it has pulled its IPO because of the FCA review.
These changes are allowing us to look again at the services we offer, how we are structured and the way in which we operate. In 2017 we are focusing on products which have higher potential revenues and which can be delivered by leaner, more efficient teams. We will never compromise the level of service we provide to our customers, but we need to be offering products which deliver a sensible operating margin.
LR: How has the liquidity and prime brokerage business changed in FX since the Swiss Franc spike nearly two years ago? How do you see it changing going forward?
Marco: The move of the Swiss Franc at the start of 2015 asked a question which the market is still trying to answer. It was the moment the world woke-up and realised that the balance between technology and risk had been broken and the result has been that regulators have chased liquidity out of the market. The deterioration of liquidity has already been highlighted by leading industry surveys, including the Bank of International Settlements.
Regardless of this, 2016 had been characterised by some big jumps in prices especially in forex markets. Perhaps rather unexpectedly, we now stand on the cusp of a renaissance in the FX market and, if carefully handled, it has the potential to benefit retail investors, institutions, brokerages and central banks alike. This renaissance will see risk spread across market facilitators, moving it away from FX Prime Brokers to include well-capitalised market participants.
LR: In the last month we’ve seen some serious regulator moves (CySEC, FCA, BaFin), on the back of Forex and or even trading bans in regions such as France, Holland and the Netherlands. How do you see this affecting the retail forex industry? What changes do you see for the sector because of these regulatory changes?
Marco: In my view, the moves some of the regulators have made in recent months are very healthy. Other regulators have taken more conservative approaches which are, in my opinion, driven purely by a lack of understanding of the industry. I believe the FCA knows our industry well and has taken a balanced approach aimed at protecting the consumers, while preserving their access to managing an investment portfolio which includes leveraged FX and CFDs; and this is very good for the industry as a whole. As a result of the changes we may see a short-term drop in volume because of the reduced available leverage, but experience elsewhere shows that clients come back with more diversified portfolios and longer term commitments. I always believe that change should be considered an opportunity for the sector to embrace rather than a threat.
The foreign exchange industry is huge and the problem is that many players are still set in their ways, carrying out business in an outdated manner and refusing to keep pace with the changes that technology brings.
2017 is year of reckoning for us all in the wake of big regulatory changes coming into force. These will include increased capital requirements for institutional players through to bilateral margining of non-clear transactions. Firms who don’t understand their risk exposure, or do not work closely with regulators, are putting themselves as risk. At ADS Securities, we anticipated this and strengthened both our Risk, Legal and Compliance functions with the hiring in 2016 of Karl Sees as Global Head of Risk and Oliver Hallsworth as Global Head of Legal & Compliance to add to the knowledge and experience we need in these areas.
Some big players may decide to exit certain business lines because they are not prepared to keep investing or simply because it does not make economic sense. Regulatory adjustments could lead to a number of brokerages, and some well-known banks, finding themselves in trouble and in need of bailouts, especially in Europe.
LR: What can we expect to see from ADS Securities in the coming months? Where do you see the most opportunity?
Marco: We have a clear vision of how the foreign exchange industry is changing and see an opportunity to be at the forefront of a new global market. We are adapting our business model so that we are an organisation which adds value to our customers beyond the traditional pure broker concept.
We have certainly seen a nervousness from market participants to get involved in fast-moving markets, largely because they feel overburdened by regulatory risk. This is taking great swathes of volume out of the equation but we have clients who have specific needs for credit, execution and liquidity. Where we can demonstrate added value, clients will pay for it. Whether this is through our market-making capabilities or our prime brokerage services.
Prime brokers, banks, intermediaries, technology providers and end-investors need to be part of a positive value chain and understand that brokers need be compensated for the added value they bring to the transaction. To this end, we are evolving our model. Until more recently we have been providing indirect access to liquidity between two parties that do not want or cannot work together, and it has become more and more difficult to meet the specific need of some end user of our liquidity because of the lack of reliable pricing from many external sources. For this reason we decided that we need to start making our own price. If we cannot redistribute someone else’s liquidity, we need to offer our own market-making option.
Our proprietary algorithmic market-making technology is currently in testing and has shown very positive results. This will add another arrow in the quiver of services the region can offer and it will represent another important step forward for the UAE as a sophisticated financial centre.