Foreign exchange (FX) prime brokerage in Asia is a major growth market. Demand has been driven to record levels by the boom in trading Asian currencies, especially on and off-shore renminbi, as well as bullion. There has also been a big shift in investment manager operations, which have increasingly moved from trading Asian currencies outside the region to local domiciles.
At the same time, tighter regulations requiring higher levels of minimum capital such as the Basel III liquidity coverage ratio (LCR) are drastically hiking the cost of capital for banks, especially in Hong Kong, Malaysia and Thailand. This, together with rising reporting and legal expenses related to operating in the space, has forced prime brokers to be stricter when allocating their capital.
“There has been a resurgence of sorts in the FX space, and the Asian markets are no exception,” says John O’Hara, global head of FXPB and FX clearing, platform sales Asia, at Societe Generale. “In fact, with the increase in the number of fund managers located in Asia Pacific, it is arguably the region poised for the largest percentage growth globally over the next few years.
“As new funds are launched, the most effective way to gain access to liquidity is via a prime broker. However, with the provider resizing that has occurred and newly adopted, self-imposed restrictions on minimum account size, market entrants often find themselves struggling to find a home.”
Since these emerging managers often require services beyond the traditional FX PB offering – such as centralised clearing of select instruments, typically nondeliverable forwards – the list of viable partners diminishes even further. “A situation has developed where there is growing demand for FX PB and ancillary services in Asia Pacific and a shortage of providers able and willing to meet this demand,” he adds.
Escalating fees, regulatory capital and rising business costs have ensured that margins are slim, so scale is everything. Liquidity providers that offer both an international footprint and local knowhow can pick and choose their clients. Brokers have also been quick to grow their market shares through the primeof- prime model, offering micro contract trades, often with leverage, and credit services to smaller firms unable to access FX prime brokers directly. Some smaller hedge funds and asset managers make do with mini-prime and cloud providers, another sector that is growing at speed.
ADS Securities launched its FX prime new and exciting channel,” says Louisa Kwok, head of prime of prime sales at ADS.
“Uncertainty in western financial markets, as a result of Brexit in the UK and the new President in the US, is driving many traders to put a greater percentage of their business into Asian markets. We see growing interest in opportunities in Asia and the need for Asian institutions to trade in their domestic currencies via NDFs.”
The cost to trade these local instruments and currencies, which are lower in volume than most G10 currencies, is often higher, and they are less accessible, so Asian firms need to look for partners that are able to leverage their capitalisation to offer greater access to liquidity providers, and at preferential rates, according to Kwok.
“We saw this especially towards the back end of 2016 with increased emerging market volumes in particular in Asia with Tokyo, Hong Kong and Singapore capturing most of London’s loss in volume. Globally, as tier one prime brokers continue to focus their efforts on selected large brokers, ADS has been able to fill the gap for middletiered clients that alone have lost a lot of their PB options, as well as clients who are looking to access additional lines,” says Kwok.
“Clients in Asia have shared the same experience, so it made sense to expand our prime offering. For clients in Asia we have increased our currency scope and laid foundations to ensure easier access for clients to setup their targeted liquidity providers.”
Exits and entrants
The shortage of capacity in Asia has also been exacerbated by a number of exits. European providers in particular have been forced to retrench and refocus their efforts on domestic markets as a result of higher operating and financing costs through uncleared margin. The exit of Rabobank in 2014 was instrumental in opening up the lower end of the market as, although the Dutch bank offered direct credit lines to the interbank FX market, it also serviced the middle market of less well capitalised firms that the major providers ignored.
One newcomer making headway is CFH Clearing. “Having offices in Hong Kong and Tokyo is key,” says James Dewdney, institutional sales, based in Hong Kong. “It is important to be able to operate within the Asian time zone and to have team members who speak the local language and understand the business culture. It marks our commitment to the region to be able to invite clients to our offices or visit them for face-to-face meetings. In many cases, meaningful relationships cannot be forged solely on the telephone – this is arguably more pronounced in Asia compared to the West.”
“Active, sophisticated FX clients in Asia are aware that London is the capital of global foreign exchange and that London-based data centres boast the busiest and most liquid trading centres,” he adds. “They are also aware that the FCA provides one of the most respected regulatory frameworks in the world. This creates a huge opportunity for CFH – as we have a point of presence in the key datacentres and are authorised and regulated by the FCA.”
Stater Global Markets, an FX prime of prime brokerage established in London last October 2016 by CEO Ramy Soliman, began marketing its services in the region at its first trade show – a Hong Kong-based event – in February 2017, and has taken on Wei Xu, a native Chinese speaker, with experience in the Asian market, in the role of operations manager.
“With the increase in prominence of Asian hubs such as Singapore and Hong Kong for global FX trading, we see an underserviced institutional market in addition to a well-established retail investing community very familiar with FX and bullion,” says Soliman. “The region also acts as an excellent conduit to the Chinese market, which has significantly increased in sophistication. As reforms make the yuan a more significant global reserve currency this will further increase the regional importance of the Asian market.”
“Unlike in other regions, many professional and institutional traders have not historically had much access to prime-of-prime services that can offer them direct market access liquidity aligned to institutional-standard technology and service from a top tier jurisdiction. We believe 2017 will be a year when specialisation will be key. Professional traders that may be trading elsewhere will gravitate towards institutional services.”
For asset managers, the incidence of black-swan events in recent months has highlighted the importance of stable, executable price liquidity, and improved price discovery. Technology and platform quality is also a critical differentiator. Some of the newcomers have been able to build integrated platforms, offering clients a single interface from day one.
“With a limited number of proficient FXPBs and FX clearers in Asia Pacific jurisdictions, there is a particularly large bottleneck for managers seeking to employ their strategies and put investor money to work since there are fewer firms with which they can partner,” explains Stephen Woodrow, platform sales Asia at Societe General. “This is increasingly frustrating for portfolio managers as volatility continues to increase and they have been unable to capitalise on it. Undoubtedly, this frustration, once adequately vocalised, will draw the attention of those seeking to secure a foothold in the region – early mover advantages clearly exist.”
Raymond Mok, head of FX and bullion development, Sucden Financial (HK) Limited, agrees: “Clients are becoming increasingly sophisticated, requiring not only good pricing and liquidity, but also new technology, comprehensive risk management tools and customised trading solutions. Those that are able to stay ahead of the curve will make a positive impact on all the stakeholders.”
CFH has developed a portfolio of proprietary technology. “Our focus remains on providing clients with the correct tools to be profitable and grow – whether this takes the form of assisting our clients with adherence to regulation, profitability of their B-book, liquidity optimisation, hosting/connectivity in data centres or white labelling options,” says Dewdney. ”We will continue to market to sub-regions in Asia and have ambitious growth plans in the region.”
While China is plugging holes in its foreign exchange rules to keep its currency and reserves from sinking below key levels, the trend among governments in general has been to become more liberal.
“In South East Asia, local regulators are gradually easing the control on foreign exchange and our customers see this as a tremendous opportunity to distribute the liquidity to their customer base,” explains Pierre Perras, product manager for FX cash on FusionCapital at Misys. “The challenge is around always being able to find a reliable source of liquidity given the regulatory constraints.”
“Infrastructure in Asia is not as mature as in the American and European market place, but liquidity is getting stronger and Asia has been catching up over the last five years. That is why some FX players are still relying on European prime-ofprime to address clearing and liquidity challenges in the Asia Pacific region.”
FX connectivity services provider FXecosystem has instigated a new network operating centre (NOC) and engineering facility in Asia to help FX trading firms in the region maintain service and reliability levels.
“FXecosystem’s expansion in Asia has been driven by demand from our European and American institutional and local retail FX clients wanting to access the better infrastructure and connectivity in Asia,” says James Banister, CEO. “To service this growing demand we have invested heavily in our global network to offer our clients ultra-low latency network connectivity. Our headquarters in Singapore and points of presence in Singapore and Hong Kong underpin our expansion in the region.”
The company’s Meet-Me-Room enables clients to have a single point of entry to connect to FX participants. Banks and brokers trading across Asia, London, New York, can use it to connect over 70 different venues. The roundtrip delivery time between London and Singapore is 187ms, the company says.
“There is a disconnect between the blistering growth occurring in Asia Pacific and FXPB’s ability to keep pace,” adds OHara. “It is doubtful that this mismatch will persist indefinitely as providers shift their attention from regulatory imposed distractions and get back to the business of doing business.”