Having shown their resilience in the early days of the pandemic, bank FX trading departments are turning their sights back towards the operational developments that will ultimately secure their long-term viability.
For super-regional and country-champion banks, this question becomes one of focus and differentiation. Which markets to prioritise? Is this profitable business? Does it fall within operational and regulatory best practices?
These are valid considerations. Super-regional banks are more than capable of running such a business, but face more limitations. They don’t necessarily have the scale of global institutions when it comes to liquidity. And, with staff continuing to work remotely, providing 24/7 coverage presents logistical challenges.
What super-regional and national banks are realizing is that their strengths lie in their unique client franchises and providing full coverage around their local currencies. By focusing more resources on the respective currencies of the areas they represent, super-regionals stand to gain an expertise and market share that becomes increasingly unassailable and profitable.
But what to do about broader coverage? The answer is simple: partner up with peer banks.
These institutions don’t necessarily have to be the global players. It only takes a handful of super-regionals banding together to cover a vast swath of the world’s top currency pairs. Ideal partners for super-regionals would be those peers that are complimentary in their services and their desire for coverage. These partners can help address gaps in existing FX coverage while reducing the operational strain of trying to offer global 24/7 support. In other words, partner banks can provide overnight coverage as well a readily accessible pool of local currency liquidity.
Above and beyond market coverage, these super-regionals can look to become specialists in specific products or trading capabilities, while outsourcing more commoditized execution capabilities.
One example where outsourcing can create far more value is the segregated execution of resting and benchmark orders.
Providing coverage for these orders, especially as hedging strategies become more sophisticated, is a staple of client service. Yet, without automation, this coverage can be prohibitively costly. There’s the trading infrastructure itself; then there’s the expense that comes with hiring new trading staff and ensuring regulatory compliance, especially with stringent requirements about monitoring, risk controls and execution quality.
Thus, it makes better business sense to entrust these capabilities to partners that have well-established capabilities. This could be another super-regional bank; this could also be a technology provider who can be flexible and cost-effective. The technology and execution partners would not only provide superior coverage; they would also ensure that the trading architecture and compliance workflows remain ahead of changing market conditions.
Partnerships like these enable the super-regional or national specialists to focus on building superior, responsive client relationships while outsourcing various elements of market and operational risk to others that are well equipped to manage it. Super-regional desks can focus on products and practices that are far more lucrative. They can also avoid much of the cost and regulatory risk of manual processes.
Another example where outsourcing makes sense is algorithmic execution.
Building algo capabilities also requires extensive investments that may ultimately not warrant the cost. This involves: hiring a team of quantitative traders, analysts and coders; building and testing order and execution algos; adapting algos to market conditions; extensive monitoring and TCA. The super-regional bank that makes these investments has to then hope that client demand is sufficient enough to deliver a solid return on the investment. Without quality execution, customers aren’t going to return.
This, along with the order capabilities outlines earlier, is where new opportunities are created for larger banks. Institutions that already possess exceptional order, execution and algo capabilities and can scale and white-label these offerings for additional institutions. Additionally, technology providers can look to expand or enhance their off-the-shelf, white-label capabilities.
White-labelled algos deliver quality while ensuring brand continuity for the super-regional, especially where clients may feel especially confident knowing their bank of choice can handle their more complex FX needs. The relationship between white-labelers and users can vary, depending on each institution’s need. The algo provider can be wholly behind-the-scenes; they can also be disclosed, especially when they represent a globally trusted brand. There will also be some considerations around disclosure based on the Global Foreign Exchange Committee’s FX Global Code.
For global banks, white-labelling and providing outsourced services creates new revenue streams for FX businesses. Diversification is a strength in a market that continues to grow more competitive, especially as the vast majority of trading is done electronically.
Above and beyond execution capabilities, the automation of additional trading and sales workflows is paramount. The ability to address sales inquiries, support close relationships and quote orders more favourably, based on risk profiles and relationship tiering is highly advantageous for super-regional institutions. This is especially true as trading and sales teams remain dispersed and separated from each other.
Priorities have changed. As the economic landscape remains uncertain, super-regional and national banks must be smart with how they run their trading operations, putting a deeper focus on what delivers the most value for them and their clients. It’s in light of these developments that the case for stronger relationships and putting more in the hands of trusted partners becomes far stronger.