Peter, you joined Saxo Markets in 2014 after nine years at Rabobank. How would you describe the state of the FX Prime Brokerage industry today and the way that it has recently been evolving?
The FX Prime Brokerage industry is generally in good shape, despite the drastic changes experienced in the past 12 months. On a daily basis, hundreds of thousands of trades are entered into, by thousands of counterparties, given up and settled with great speed and accuracy. Even when stressed (during the SNB event for example), the prime brokerage plumbing held together – it’s a remarkably efficient network operating in milliseconds and involving trillions of USD every day.
The main changes in the past year have been with regards to the best way to further mitigate or control risk. We all know that some of the traditional bank prime brokers have stopped offering FX PB service altogether, some now only offer it as a complimentary service for very large clients, and some have changed their fees and client acceptance criteria –all which have raised the bar for the size and creditworthiness needed to utilize their services.
As well as scrutinizing the client more closely, prime brokers have also been looking at ways that a new generation of low latency technologies can be used to reduce risks. The introduction of dynamic limit allocation, kill switches and ‘pre-trade’ risk controls (where a client’s exposure is calculated before a trade is allowed) are a key part of the rapid evolution of the FX PB market.
What do your day to day activities within Saxo Markets usually involve?
I have three main roles. Firstly, as a product expert, I head up the sales effort for our FX Prime Brokerage service. Secondly, I work with our clients and explain the best setup for their needs; and thirdly, I interact with our API specialists and E-Trading Client Services team to ensure services are delivered in an efficient and timely manner for clients.
Saxo’s institutional business provides trading, liquidity and post-trade services, as well as well-established white label solutions. How does the FX PB unit fit into this overall structure?
FX prime brokerage relies heavily upon connectivity, liquidity, credit and post trade reporting, so it is reliant on a number of different people and teams all operating in unison. Saxo Markets operates from three geographic hubs, which each containing members from relevant teams to offer seamless 24/5,5 support globally.
Given our rich retail heritage and disruptive use of technology for innovation, Saxo’s infrastructure (systems, people and processes) is cutting edge and built to scale for hundreds of thousands of concurrent clients. Leveraging this capital toward addressing FX PB client’s pain points is a natural extension of our core business that enables us to easily support hundreds of institutional clients in a very efficient way. This gives us a huge lead over other prime brokers, which tend to operate in silos. To date, customer feedback has certainly supported our approach.
Who are the other key members of your FX PB team and what responsibilities do they have?
Lucian Lauerman, who heads up the API business, makes sure that the bank’s infrastructure and market connectivity are optimized and that solutions are delivered to our meet clients’ needs, whilst Christian Lonborg Thomsen ensures that clients have access to the best possible liquidity by managing relationships with numerous bank and non-bank liquidity providers.
Nicolas Khouri heads our global E-Trading Client Services team, who manage our FX PB clients’ progress through pre-sales and on-boarding, monitor & optimize their execution & liquidity, and provide support for any problems they may face—around the clock.
Kurt Vom Scheidt is our Global Head of Foreign Exchange, and is responsible for the overall strategy of the business. He is based in our Singapore office, underscoring how important the Asian region is to our business.
Neil Browning heads up FX Sales for the bank and is based in Copenhagen.
What types of institutional clients are your team mainly providing services for?
Saxo Markets’ strength is in servicing mid-sized clients such as hedge funds, asset managers, brokerage firms (which may have both institutional and retail clients), proprietary trading firms and family offices. Many of these clients previously used the traditional bank PBs but are now looking for a more technology driven/multi-asset product. Unlike most traditional Prime Brokers, by default, Saxo does not also provide its own FX pricing and liquidity to our Prime clients, making us a non-conflicted service provider that focuses on aligned client interests regarding optimized executions.
Most of the risk management in FX PB has traditionally been on a post-trade basis but things changed after the SNB event last year. How important are pre-trade risk controls for Saxo Markets and how do you leverage them to allocate credit more freely and effectively?
Traditionally, client activity was controlled on a ‘post trade’ basis. This meant that only after deals had been executed and given up to the prime broker could an accurate calculation be made about clients’ overall exposure. This is less inefficient for a client doing relatively few trades per day with minimal NOP usage, but is far from optimal when it comes to a high frequency trader, which could potentially transact thousands of trades a second.
Saxo places great importance on controlling risk on a pre-trade basis and has proven to be a thought leader in our industry, including due to our pioneering roll out of pre-trade risk management practices. Our market access infrastructures allow us to provide clients with access to abundant liquidity across multiple venues/sources, whilst providing efficient protection for both the bank and the client against breaking their trading limits. This is one of the reasons why Saxo is still able to provide a comprehensive FX PB service to mid-market FX PB clients.
Why do think Prime of Prime (PoP) brokerage has become so popular and what do you see as the key operational advantages that it offers?
Other bank’s PBs have been more reluctant to service the small to mid-tier clients looking for credit intermediation. Saxo’s technology-driven FX prime brokerage however, offers much more than just access to credit.
Our tripod of FX PB services of course includes the essential service of credit intermediation, but also includes low-latency co-hosted connectivity, which then supports the third leg of provisioning customized liquidity that is optimized for market access for our clients, based on their own unique flow characteristics. We are able to offer this service to clients in a scalable fashion because we have decades of experience tailoring liquidity pools and measuring execution effects for our own hedging purposes, ranging from multiple systematic and algorithmic approaches to manual trading.
The FX PoP space has started to get quite crowded so what key factors should influence a firm’s choice of provider?
What is essential is to choose a well-capitalised PB with broad and deep access to liquidity. It’s not enough to just provide clients with access to a price stream; there should be a choice, including bank and non-bank LPs as well as a wide range of ECNs on offer.
We offer clients true direct market access (DMA), with connectivity options ranging from making markets directly into ECNs to taking via relationship feeds (either on a pre-aggregated anonymous, or semi-disclosed basis). Saxo is very well regarded and positioned in the top tier of the PoP market, being the innovators in providing clients with access to cutting edge risk management tools.
Post-trade services such as the ability to clear large numbers of micro tickets, block trade allocation (available to investment managers at no extra cost) and real time account management are also key differentiators to look for when choosing a prime broker. Post-trade reporting that address a particular client’s specific needs—for example, an FX broker: EOD files for reconciliation, daily swap rates, and LP flow split transparency reports—should also be considered.
For the buy-side, real-time notifications that can feed into a middle office system—such as ‘STP’ing’ trades to eliminate manual re-keying, or automated credit utilization alerts—can help clients monitor and reduce risk. For those looking at platform building, firms can look for products like Saxo’s OpenAPI, which allows our clients to hook directly into our front- and back-office infrastructure.
Additionally, Saxo is being disruptive in digitizing capital introduction, with its ‘SaxoSelect’ product, an important new service for emerging investment managers. Beyond this, users can also have access to trade many other asset classes on the same platform. The depth and breadth of our offering is what makes Saxo Markets unique.
Many large banks still feel they have compelling FX PB offerings. Do you think that competition between these banks for the big clients, and among the PoPs for the smaller clients, is more intense than that between the banks and the PoPs?
Yes. One of the most apparent changes in the PB market over the past year has been the ‘rightsizing’ of clients to providers meaning that the cut off point for clients between a traditional PB and a PoP is much more clearly defined. Clients now need to look at how far down the chain of PoP providers they want to go, and where they want their assets held. That said, Saxo are also achieving success with larger clients that realize the benefit of additional value-added services that some PoPs can offer compared to other traditional relationships.
Increasing numbers of firms are now looking at multi-asset trading. In what ways can a PoP make trading in multiple instruments more margin-efficient?
One of the benefits of prime brokerage is the ability to net trades and exposures from multiple sources. When you add to that the ability to cross collateralize different financial instruments against each other within the same Saxo account, the advantages are clearly apparent.
Saxo Bank Group has always invested very significantly in new technology. Why is that so important in providing FX PB services and how does it help your firm to differentiate itself from competitors?
The vast majority of trading is now done electronically at very high speed. Being able to efficiently clear a huge number of trades whilst managing the risks in a controlled manner relies on having the latest technology.
When Saxo assessed the opportunities in the PB market several years ago (well before the SNB event), it was apparent that the efficiencies of a technology-led FX clearing solution for our clients by making use of pre-trade risk controls, built on Saxo’s high volume transaction infrastructure, could be a key differentiator for attracting clients. As we have built out the offering, choice has also been important as one size doesn’t fit all – Saxo provides a wide range of liquidity options in multiple data centres around the globe.
What plans do you have for further expanding your FX PB business beyond its traditional hubs of London, Copenhagen and Singapore?
We feel our clients are well supported by these three main institutional hubs. Beyond this, Saxo is present in 26 countries around the world, so we are already close to our clients. The three centres of excellence make it more efficient to service their needs on a 24hr basis.
Many large banks remain reluctant to do business with smaller funds. What impact is that likely to have on the future growth prospects of Saxo’s FX PB unit?
We have seen strong growth in this area, as Saxo has the tools, products and expertise available for these smaller funds to operate and flourish.
Our legacy in working with emerging institutional clients on their path to growth over the past 20 years has given us a huge amount of experience with clients of this size.
We have extremely flexible back-office solutions and account structures that can be adapted to grow with our clients and support their expanding requirements over time. We expect this client segment, and Saxo’s share of it, to continue to grow.