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LeapRate Exclusive Interview… Retail Forex brokers are typically the ones running contests for their clients (and to attract new clients). However it came to our attention that someone is running a contest for the Retail Forex brokers: new Ireland-based FX central clearing provider FXCH.
FXCH is a new approach to Spot FX clearing, settling trades utilizing Blockchain – distributed ledger technology. FXCH’s virtual Clearing Hub allows trading on any participating eFX venue and settles on-ledger from a unique consolidated account.
We’re pleased to speak today with FXCH Managing Director Franck Mikulecz about FXCH’s new approach to FX clearing and how it works, their contest for FX market makers, and a whole lot more.
LR: Hi Franck, and thanks for joining us today. Please let us know a little more about FXCH and its founding, and the people behind the company.
Franck: After operating for more than 8 years as a Prime-of-Prime for institutional clients (as BAXTER-FX), we realised that the FX market was choked by the Tier-1 Banks who started to retrench from their role of access providers.
In effect, the last 3 years have seen a few large Prime Brokers pull out completely, and the remaining ones raising the conditions to open an account quite dramatically, both in deposit and capital requirements.
Because we have a Futures background, the central clearing solution always attracted us. We tried to convince a couple Futures Clearing Houses to clear Spot-FX in partnership with us without too much success.
The time seemed right for an alternative solution, but we decided to create a Startup to allow any firm to become a Member and share this new clearing solution.
LR: How does FXCH clear FX trades in a manner differently than what is typically done today? How exactly does the company interact with Forex brokers?
Franck: The breakthrough really is that you can clear Spot-FX without the need for a Tier-1 Bank.
We use the Blockchain to make every movement of cash totally transparent in real time, and gain trust from the participants.
The solution is not specific to any type of participant, but a Forex Broker can become a General Clearing Member (GCM) like with a Futures Clearing House and carry his customers’ positions, with a possibility to segregate their accounts. The trades can be done virtually anywhere, once FXCH receives the messages and they are confirmed, they are novated against the Clearing House.
LR: We read that FXCH is holding a Market Making contest for small FX brokers. (Interesting that the brokers will be on the other side of a contest). Can you please explain more about who the contest is for, and what it is trying to measure?
Franck: Markets are never changed single-handedly by one or two large institutions. We believe that a group of small-medium non-bank trading firms can do a better job at making markets than Banks. Often it is the clearing costs and access than stops very capable teams to grow.
For FXCH, the quality of the liquidity in our Clearing hubs on various e-FX platforms (e.g. Currenex, Hotspot, FXall etc.) is an engine of growth. We want to harness the power of the emerging trading firms and help them grow at the same time.
We will measure the uptime, spreads, top-of-book presence (one side is fine), rejection rates, number of currency pairs supported, sizes provided etc.
The idea is to reward the best 5 firms with a long term deep discount that will allow them to compete with any Bank or large non-Bank LP.
LR: What is FXCH’s target market? Where do you see FXCH taking market share in the coming months?
Franck: We target institutions of any size, but are conscious that the nature of our solution is not interesting for banks just yet. The likely takers are firms which want to lower their dependence to Prime Broker Banks, and that means Pro-trading firms, HFTs, Prime-of-Prime brokers etc.
Our market share will kick-start with all the users that banks don’t really want to serve, and gradually migrate toward to bigger participants. We have a natural fit with FX Brokers and LPs serving them with liquidity.
LR: What are the main obstacles for normally ultra-conservative financial institutions in implementing distributed ledger technology?
Franck: Generally the understanding of the technology, and waiting for widespread adoption. The large institutions have more to lose with a technology incident, so they prefer to see someone else do it and join afterwards.
In our case we have made a special attempt not to change the way FX is traded or cleared. The Blockchain is used for transparency and real time scrutiny in what the Clearing House is doing to the User/Member funds. The real revolution is that settling on the ledger means we are not dependent on a bank to make expensive international payments and operate a slew of costly steps they have invented.