The Great FX Liquidity Debate: CFH senior executives discuss how to succeed in emerging markets


2015 began with an event which changed the entire landscape of the FX industry, exposing a need for new risk management procedures, opening a debate regarding execution models, and calling into question the future security of sticking to existing safe havens for FX trading, specifically the Eurozone with its major currency beginning to strike fear into the heart of even the most seasoned financial markets experts, backed up by Switzerland’s removal of the 1.20 peg in order to preserve its vault-like fiscal security.

Seeking new business in emerging markets has been a successful key to expanding the profitability of retail FX firms, liquidity providers and prime brokerages alike, however the current distribution of business is contained within specific regions, namely Cyprus, Australia, and Britain, with retail brokerages in said regions attracting business from Malaysia, Indonesia, China, the Middle East and Russia, and subsequently passing the order flow to prime brokerages in London.

As competition increases, and the need for a new methodology becomes increasingly clear, firms are seeking establishment in new, promising regions, the idea being to set up brokerages in emerging markets and serve a local client base, much to the interest of established prime brokerages and liquidity providers.

One specific example is CFH Clearing Limited, a mainstay of London’s highly advanced financial services and financial technology sector. Senior executives from CFH Clearing spoke on many current and important matters at the FXIC forex industry conference hosted by Shift Forex in Mexico City earlier this month.

LeapRate first spoke to Nick Mortimer, Head of Prime Brokerage and Clearing, CFH Clearing Limited in order to ascertain the attraction of exciting new markets.

In terms of entering emerging markets, how does Latin America compare to Asia as a land of opportunity for providing newly established FX brokerages with a comprehensive liquidity solution?

“Firstly, I think the major difference between Asia and Latin America is the culture. In Asia, retail customers prefer to trade their own cash whereas in the Latin America region customers are much more open to using Money Managers. As a result, there’s a real need in Latin America not just for liquidity but also for technology in terms of both allocation and risk management for the Money Manager. We believe that our ClearVision technology encompasses all that is required for the Broker/Money Manager to be successful and this has been proven with the names we are currently working with in the area” Mr. Mortimer explained to LeapRate.

With this in mind, LeapRate moved the discussion on to focus on Mexico City as a region which liquidity providers and prime brokerages can tap into as a region which can bridge the gap between the existing FX strongholds and the network of Latin American IBs and traders, and gained Mr. Mortimer’s view.

“The Latin America region is a few years behind Asia in terms of a retail explosion but what was evident from the recent conference in Mexico City is that structured marketing as well as education is required to push things forward. I think it’s important that LP’s and Prime of Prime providers try to work with the existing Brokers/Money Managers in Latin America to customise solutions to help their businesses to grow” said Mr. Mortimer.

As far as cost model is concerned, it is important to establish how this can differ in emerging markets from existing regions which are synonymous with FX.

“I do not see any difference in the cost model for this particular area” confirmed Mr. Mortimer. “What I do see is that liquidity providers and prime of primes need to provide a more all-round solution in terms of technology and liquidity.”

Let’s talk execution models. Currently, CFH operates A book liquidity, therefore, LeapRate asked Mr. Mortimer to detail which markets can sustain totally A book liquidity and still provide brokers with a profit, and which markets could be considered fit for a hybrid model combining A and B book, taking some risk management in house.

“CFH Clearing fully believes that operating a full STP model gives our clients reliable and cost-effective execution during both normal market conditions and volatile times. We do not want to run any of our clients’ positions but would rather offer Tier 1 liquidity from major global investment banks and charge accordingly” said Mr. Mortimer.

This brought the discussion to the subject of liquidity providers and prime brokerages adapting their business models to reduce risk and still maintain a profit margin post Swiss black swan.

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On this matter, Mr. Mortimer concluded that “I think they will re-evaluate both their credit terms and their risk management capabilities. I also think increased margin rates will have to be passed onto customers as the differential becoming too wide will be a strain on people’s balance sheets. I also think businesses will look at widening spreads in some of the exotic pairs or will not quote for these pairs at all.”

Focusing on regional expertise in emerging markets, CFH Systems has gained a strong foothold, therefore being able to understand the Latin American market clearly. Fernando Andrade, Regional Director of CFH Systems is highly knowledgeable with regard to the requirements of Latin American companies, as well as consumers, and was able to explain to LeapRate some important factors to consider when operating in this specific region.

“The Latin America region consists of 20 countries and has a middle class and upper class with increasing disposable income” Mr. Andrade explained to LeapRate. “The opportunities in the region are tremendous; retail brokers that understand the local culture are capturing most of the business. Mexico represents the biggest potential in the region. With a population of about 120 million people and a financial sector that is constantly educating the investor regarding new investing alternatives, it has become a great place for start-up brokers looking for new opportunities” he said.

Mr. Andrade continued with some important information about FX turnover in Latin America: “According to the Bank of International Settlement, MXN (the Mexican peso) is the most liquid emerging market currency, accounting for 1.3% of global foreign exchange turnover. It’s also the only deliverable currency in Latin America, making it a preferred currency for speculative investors.

The way to enter emerging markets such as Latin America is via face-to-face meetings, at the retail account and Prime Broker level.”

“At the FXIC Mexico City event on February 10th, we met with experienced retail traders, Fund Managers, Brokers and Banks as well as several FX mentors who are currently working as IBs and are gaining new clients on a weekly basis. I remember in particular one FX mentor who currently has more than 300 students all paying to get educated in order to become part-time or full-time FX traders. Generally speaking, the margin for retail brokers in Latin America are better than in any other region in the world as competition is not primarily in pricing. Retail traders are looking for education and some IBs/Brokers are providing that service as business grows in the region” confirmed Mr. Andrade.

As far as being able to grow and succeed in a new market is concerned, Mr. Andrade stated that “The key to growth is offering educational services to retail clients.

For CFH Systems, we have come to the region to find strategic partners, to build long-term relationships, to understand our clients and to meet the demand for our technology solution for the FX brokerage community. Please note, CFH cannot take retail business directly but our clients and prospects are retail brokers who are taking advantage of today’s growing retail sector. They understand the local retail business better than us and know how to service it. CFH Systems focuses on helping these retail brokers to grow their business via cutting edge technology and operate more efficiently and effectively.”

LeapRate concluded by seeking Mr. Andrade’s perspective on what technological advantages CFH Systems has over its competitors, and how the company can compete for market share among retail brokerages in existing and emerging markets.

“On the technology front we offer market-leading solutions. With our ClearVision suite of products, Latin America Brokers and Banks have access to a full range of trading and back office tools within one platform. Using ClearVision, our clients can manage liquidity, risk management, collateral and reporting from one place. Most retail brokers in the region offer MT4 as a front-end platform to their clients and we can integrate our ClearVision technology into MT4 as well as a range of other front-ends. We offer all the tools to help brokers with their current requirements as well as the scalability to help them to grow to the next level” concluded Mr. Andrade.

Photograph: Nick Mortimer (Left) discusses execution models with senior global industry executives at FXIC in Mexico City

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