The execution debate live from FXIC New York: Prime of Prime, exchange or aggregator?

New York, the world’s capital city and home to the longest established and most lively electronic trading industry on the face of the planet; the nerve center of all developments which form the entire modus operandi of our business.

The FXIC conference, taking place today at the Grand Hyatt Hotel in Midtown Manhattan, is hosting a lively debate among leaders of the industry, in its most prominent heartlands, and what more important subject to commence the day’s series of discussions than to take a close look at the current FX market paradigm: liquidity.

No greater or more rapid requirement for change in the execution model and liquidity provision in the entire annuls of time has made itself present than that of this year, spurred by the Swiss National Bank’s decision to remove the 1.20 currency floor on the EURCHF pair, setting an entirely new criteria for exchanges, brokers and liquidity providers alike.

Here today in New York, liquidity and execution is high on the agenda

New-York based lawyer practicing in the areas of commodities and derivatives law John P. Drohan III Partner at Drohan Lee LLP, began by opening a dialog on structural and risk changes in the entire FX industry, including counterparties representing exchanges post January 15, and looked toward leadership on risk management.

Jasper Chua, Head of FX Prime Brokerage for the Americas at Society Generale immediately responded by stating that “FX Prime brokers have been shifting for a few years, and the process has now accelerated.”

“We are now reminded that the entire concept of FX prime brokerge was created to target volume and market share, identify flow and capitalize on it. Fees have been declining as a common practice, and the sector has been shifting toward transaction based activity. Since then we began to start to see that there is not much money to be made in FX prime brokerage alone, so there has been a move toward multi-prime offering. FX prime brokerages are now having to start working toward multi-facet relationship with clients.”

Mr. Chua further explained that “there needs to be more equity prime brokerage execution, and banks are starting to look at a holistic approach toward capitalizing on all products working together. That is a dynamic that we will see accelerating.”

David Newns, Global Head at Currenex is an industry professional who understands this aspect very clearly indeed “Following on from Jasper’s comments, it is important to discuss the electronic platform market. The Swiss National Bank move was an interesting event for us, we found the moment where the infrastructure is being tested to extremes, when extreme events occur” he said.

Low volatility masked the need for robust liquidity – until now!

“Platforms were under great strain, and from the current perspective we had no capacity issues.  It is of course deeply unsatisfying that losses were sustained but it highlighted that from a platform perspective, robust liquidity is necessary. The need for that has been hidden by the low volatility over last 2 years. Now the spikes are showing the need for robust liquidity. Certainly one of those situations posed the question as to who’s left standing with underpants on. We had an impressive pair of underpants!” exclaimed Mr Newns.

David Holcombe, Head of FX, NASDAQ brought his extensive knowledge of the collective interests of professional FX market participants to policy makers and the marketplace and the need for transparency into the discussion  “The Swiss National Bank’s actions accelerated something that was already in process. It highlighted risks not being adequately managed. There is a trend in the market for people to look at alternatives to traditional principal model, and embrace more of an agent model. Looking at additional venues and then with a different perspective” he said.

“NDF clearing regulation is one small piece of this, it is something that has been a regulatory matter, but regulators have backed away from this for now. Some of the work we do at FXPA is that rules must be made to take into account rules in other jurisdictions as we dont want to create any opportunities for regulatory arbitrage” stated Mr. Holcombe.

The role of Prime of Prime brokerages and bilateral liquidity

“There is a tendency for people in every business to wait and see what happens with regard to the structure of costing the execution process. If you look at the vast difference between using a single provider, the cost is around $13 per million of trading but comparing this with the cost of keeping it bilateral shows that it can accelerate to $170 per million” said Mr. Holcombe.

At that point, Mr. Newns delved into the subject of examining bilateral liquidity relationships “There were certain liquidity venues that did not do as well as others during the Swiss National Bank situation, there were certain venues and companies that didn’t run into difficulties as they had bilateral relationships with their liquidity providers. Having multiple bilateral means liquidity when you need it.”

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David Emerick, Senior Director, FX Products at CME Europe added to this by stating that “If a clearing house opens itself up to be a cash venue, it can open itself up to a huge liquidity core.”

Mr. Chua followed on from that detailing that “Venues and companies should be able to cross-margin to diversify risk away from single products. Prime brokerages are starting to understand how things should be pieced together, starting to understand where their products belong, and where the overall opportunity is in mitigating risk and reducing margins.”

Nick Mortimer, Head of Prime Brokerage and Clearing at CFH Clearing Limited brought the legalities into the equation: “Regulators are looking closely at the systemic risk posed by clearing” he said.

“The idea that concentrated counterparty risk is not compatible with the bilateral arrangement is being discussed. The way we look at it is that we just want to clear a ticket, and therefore always consider how to clear a ticket” said Mr. Mortimer.

Client diversity, liquidity diversity

“We are building up the liquidity for specific types of client” continued Mr. Mortimer.

“One thing that has come about since January 15 is opportunity. We have clients with vast portfolios and there is still alot of business to be done, but in 2014 we were being asked what is the top of book spread, and now clients are asking what margin can we give?”

“Our answer is what NOP do you want to run? Is it concentrated in specific regions? We are now being charged margin levels which are so high, but then customers are asking us for margin levels that we cannot get back to pre January 15. The question is where to place that opportunity. We can give customers pools of liquidity now, but it is all about moving people to a Prime of Prime where their interests can be protected” explained Mr. Mortimer.


This moved the debate on to the current dynamic in which firms are moving away from relationships with executing banks since January 15. Mr. Drohan then asked “What would happen a midsize institutional fund that has been rejected from its prime of prime, and what are their clearing opportunities now?”

Quick off the mark, Mr. Mortimer responded by explaining “I think prime of prime has to be offered to specific customers. If it is a fund, you have to give the fund prime of prime, but if it is a retail broker then I am reluctant to give a prime of prime set up because a retail broker really wants liquidity, especially if the broker wants to run risk on a B book. If that firm posts margin with me, then great, it can take my liquidity, but if its the sort of customer that may challenge the liquidity povision then i would move it over to prime of prime to give a selection of liquidity.”

Mr. Chua agreed, however he stated that if going this route, firms have “got to try to identify who to partner with. We would be more interested in partnership and about what a specific prime of prime can come with. It is important to be diverse and do a lot more than just offer prime brokerage. Firms must be able to spread risk and give us an idea of what their client base is like. there are prime brokerages that are not looking at minimum thresholds, but want to see what the whole business looks like. We have got to be able to give confidence to credit analysts that we can do business together.”

Mr. Holcombe then concluded the discussion by probing last look combined with non-last look execution, a vital consideration with regard to bilateral liquidity. “We are looking at how last look is being used to undermark market risk” he said.

“The exchange model doesn’t have last look, and therefore there will be an educational and inspection process as they will turn their attention to this aspect of exection.”

Mr. Mortimer added “I am not against last look, it is there to be used, and to be used in order to help everyone make cash, but people need to understand that if you are like-for-like in an aggregated environment, then there needs to be uniformity over last look.”

LeapRate’s Andrew Saks-McLeod then raised the question of how bilateral execution can be self-moderated, and if it is worth institutional venues and platforms to add a latency floor to create an equilibrium in which firms can use last look liquidity and non-last look without any vast variations.

The response from the panel was that this is an interesting and complex question. Mr. Newns said “Slowing down platforms would an odd thing to do and is not really interesting to us but the last look aspect is more interesting, as it is not something that the companies should look at, it is more down to the customers to select what type of execution they want.”

“We should not get ahead of the regulator, as we have a responsibility to be innovative and keep looking what both sides of the transaction want. The direction of travel as a result of MTFs, rule books, published rate cards, they will probably end up in place in the not too distant future. Investigating this is better solution rather than waiting for regulators to tell us to do it or putting in restrictions on time” concluded Mr. Newns.

Photograph: David Newns, Global Head at Currenex; Jasper Chua, Head of FX Prime Brokerage for the Americas at Society Generale; David Emerick, Senior Director, FX Products at CME Europe; David Holcombe, Head of FX at NASDAQ and Nick Mortimer, Head of Prime Brokerage and Clearing at CFH Clearing Limited

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