One of the clearest trends in the FX prime brokerage (FXPB) market has been the move towards multi-asset class coverage and global market access.
“Traditionally, top-tier FXPBs have operated across multiple asset classes but they tended to exist in silos – and not without reason, these are very different businesses,” says Frederic Allatt, managing director, FX sales, Americas at US-based StoneX Pro. “For multi-asset funds, in particularly, a coordinated approach is very attractive, particularly in terms of capital efficiencies and pricing. However, with the advancements in technology and operational efficiencies, prime brokers (PBs) have shifted towards a global market access model that covers multiple asset classes.”
“Advancements in technology have enabled FXPB clients to access FX markets via various trading venues and proprietary platforms, making low latency and robust API connectivity crucial for fostering successful relationships.”Frederic Allatt
As a result of M&A activity in the PB space, FXPBs have expanded beyond their standalone FX service offerings, and have grown by either acquiring or being acquired to create global, multi-asset firms that service to a wider range of clients, says Allatt. “However from an operational standpoint, different asset classes continue to function independently and likely will continue to do so.”
Allatt has also observed the emergence of new market participants, including cryptocurrency firms and independent money service businesses, with distinct FX requirements that differ from those of traditional FXPB clients. “To meet the unique market access needs of these clients, FX providers must be flexible and StoneX Pro has adapted its products and services accordingly,” says Allatt. “Additionally, advancements in technology have enabled FXPB clients to access FX markets via various trading venues and proprietary platforms, making low latency and robust API connectivity crucial for fostering successful relationships. To meet these changing market requirements, StoneX Pro provides 24/6 coverage from Tokyo, Singapore, Frankfurt, London and New York.”
Allatt says that StoneX Pro is seeing a large increase in demand for FX trading services across its global network due to market volatility and economic factors such as the increase in interest rates which drive the need for FX hedging. “This environment, while driving activity, also creates more challenges, particularly for emerging market pairs or non-spot products. This is where professionally managed liquidity procurement, in addition to credit intermediation, plays a valuable role,” says Allatt.
In addition, the overall growth in international trade has enhanced the need for institutions to better manage their currency risk and have access to deliverable FX, says Allatt. “We help clients price this volatility by providing a broad access to liquidity providers through our wholesale market solution. Our clients will evaluate suitable FXPBs through a number of different factors – reputation and experience, pricing, service levels, technology, risk management, geographic coverage and regulatory and compliance requirements. It is our firm belief that in order to be considered by clients, the leading FXPBs must demonstrate excellence in each category.”
FX prime brokerage services have broadened out to other asset classes and instruments in response to demand from customers, says Justin Boulton, head of FX prime brokerage at FXCMPro. “For example, in recent years, there has been a significant jump in demand for FX Swaps and NDFs as both markets have seen an increase in electronification. The latest triennial survey from BIS highlights this growth, with turnover in FX swaps increasing from $1,646 billion per day in 2019 to $1,945 billion per day in 2022, while data from Clarus shows that cleared NDF trading reached $1 trillion per month in 2022.”
The changing nature of the client mix has also had an impact on FXPB services, says Boulton. “For a long time, clearing within prime brokerage has been dominated by large tier-one banks. This trend has reversed recently as prime banks reassessed their eligibility criteria for prime clients. The majority are now focusing on large multi-asset accounts, and in some cases, they have even withdrawn their services as they seek to manage their credit and risk management processes. This has left a gap in the market for prime-of-prime services aimed at small-to-medium-sized non-bank financial institutions (NBFIs).”
It has also impacted the kind of technology services which are now considered essential for an FXPB offering, says Boulton. “Market access is the most important part of an FXPB offering, enabling customers to source liquidity from multiple sources and achieve the best execution. There has also been growing demand for pre-trade credit check controls, which enable an efficient credit allocation. People always talk about customer experience, and a big part of a good customer experience is support when you need it. It’s vital that FXPBs have support teams readily available to help customers solve problems quickly and efficiently,” he says.
“While there is a lot of choice in the market, the most important factors clients should consider before partnering with one include onboarding speed, capital requirements, and crucially, access to the market.”Justin Boulton
Another important feature is onboarding. “It can take months for some providers to complete KYC and other checks, which is too long for many clients. It’s vital that onboarding is thorough but quick and seamless to attract customers and build loyalty,” says Boulton.
Pre-trade credit checks are also essential as they ensure customers have access to sufficient credit across all venues so that their trading is not impacted, says Boulton. “Credit is the lifeblood of the FX market. Pre-trade credit checks are therefore essential and must have the capacity to operate seamlessly in the fast-paced nature of the FX market. Not only should it deliver checks, but taking our pre-trade credit solution as an example, it should be able to provide aggregation, SOR and TCA capabilities, and all back-office requirements that an FX participant should want.”
Boulton also thinks that current market conditions have strengthened the argument for FXPB offerings. “Increased volatility in FX and interest rates, in addition to the electronification of NDFs, swaps, and to a lesser degree, FX options has spurred the FXPB industry on in recent months. While there is a lot of choice in the market, the most important factors clients should consider before partnering with one include onboarding speed, capital requirements, and crucially, access to the market,” says Boulton.
Despite the significant opportunity, some are yet to see the demand for multi-asset class coverage well catered for within the prime brokerage world. “We have found a truly integrated multi-asset class PB offering quite rare, especially among our panel of tier 1 PBs,” says James Alexander, Chief Commercial Officer at Invast Global, the Australia-based FXPB,“we have heard lots of talk but we are yet to really see it.”
Instead, many of the tier 1 brokers are going back to their core offerings, says Alexander. This is partly a strategic decision with T1 PBs becoming more selective about clients and some of it is technical, in that they are not willing or able to integrate the different systems and platforms that have historically been used for different asset classes.
“We are not seeing that consolidated multi-asset trading platform or pricing engine and it is surprising because the client demand is there,” says Alexander. “There are technology challenges. For the very large PBs, it is a risk to integrate a new asset class into their legacy infrastructure and, at the moment, the risk appetite is not there.”
However, the risk aversion among the tier 1s is a huge opportunity for prime of primes (PoPs), believes Alexander, “Especially those that are willing and able to provide best in class third-party infrastructure solutions that will enable the widespread use of APIs rather than relying on existing internal systems. This is where a prime of prime such as Invast Global can potentially add significant value to clients seeking that truly integrated, multi-asset solution.”
“Firms that are willing to engage third-party vendor solutions will find it easier to extend their asset class coverage more quickly,” says Alexander. “There has been a real dearth of technology advancement and resources in recent years which has hampered banks’ efforts to retool their legacy systems. Interestingly, a lot of fintechs have shed staff over the last year so that may enable the tier 1’s to recruit more specialist technology resources, which also continues to be a key focus of our own talent acquisition plans.”
“It is essential for the PBs of the future to offer a more efficient suite of APIs, not just for pricing and execution, but for risk management, credit management and numerous other operational processes.”James Alexander
Another trend that continues to play out, says Alexander, is the demand from prime broker’s clients for greater use of APIs to streamline workflows,“This is especially important for those firms that need to aggregate a number of different PBs to achieve access to multiple asset classes. It is essential for the PBs of the future to offer a more efficient suite of APIs, not just for pricing and execution, but for risk management, credit management and numerous other operational processes. APIs done well can provide a client a singular view and ease of automated reconciliation, allowing them to streamline operational and risk-based workflows in real-time. Prime brokers that can support feature rich API solutions will grow and thrive, especially at a time when there are significant risks in relying on a single prime brokerage partner,” says Alexander.
The other area where PBs have focused is extending global access, particularly to markets like China where many of the T1 PBs have pushed heavily with their Equity Swap solutions. However, as Alexander notes, it remains to be seen what the appetite looks like among the tier 1 PBs to continue to support managers from this part of the world, Hong Kong in particular. With our headquarters in APAC, Invast Global remains committed to both providing access to Asian markets and supporting APAC based managers and broker dealers.
The recent changes in market conditions have strengthened the proposition of FXPBs, says Alexander, at least for those FXPBs that have shown a willingness to be more flexible. “It is a question of efficiency,” he says. “If an FXPB can be more accommodating and flexible in how they apply pricing and margining methodologies, they will serve their clients well. And the premium that clients are willing to pay for ancillary services is actually quite high right now. With the volatility in the FX market, there is the opportunity for greater profitability, especially for the FX participants that have partnered with the right FXPB,” states Alexander.