Banks evaluate prime brokerage models

Banks evaluate prime brokerage models

The rising operational cost of running foreign exchange prime broker (FXPB) businesses is forcing some banks to reconsider their engagement with hedge funds, proprietary trading firms and retail aggregators, making it harder for small and medium-sized clients to access interbank markets.  

As the costs of running an FXPB business have continued to rise, the revenue generated from certain client bases has meant that banks have had to scale back operations to customers that make financial sense, due to CLS and middleware fees coupled with a drop in per ticket volume making it uneconomical to service smaller clients. 

EXANTE recently met with Marco Baggioli, head of OTC clearing sales for Europe, the Middle East and Africa at BNP Paribas in London who was recently quoted as stating the following in a recent FX Week article "The result of the rise in the cost of credit combined with lower ticket sizes has seen some FXPBs decide to re-focus on key clients that aren't just PB [prime broker] clients, but also buy services across the investment bank".

As was reported last August by FX, Morgan Stanley began cutting FXPB services to certain clients, while FX Week has also learned that Rabobank has recently moved away from some clients and re-evaluated its operations in certain geographies.

 Small and medium-sized firms are finding it increasingly hard to access the interbank market via prime brokers as major banks have pulled away from certain areas of the market. Practically a whole tier of customers has been left without PB services, It's definitely not as easy for a small prop shop with little capital, a small broker-dealer, whether retail or not, or smaller hedge funds to find an FXPB in the current environment. Hedge funds probably need more assets under management than was needed 10 years ago, so if they come in with $10 million, they're going to find it hard. 

The void has been picked up by firms such EXANTE as new, boutique providers and intermediaries, which are now offering PB services to clients looking to access the interbank market, The fact some of the large banks have pulled back a bit with some of their mid-sized clients has opened up an opportunity for other providers, and it's a good fit because the mid-sized client is our spot in the market. We've helped transition clients from being smaller firms into bigger ones, which then in turn want to go from having a broker relationship to a prime broker relationship. 

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