Offering FX and non-FX services via a shared platform is a key trend in the boutique prime brokerage market, particularly when servicing clients who need to be able to optimize their collateral by using a limited number of intermediaries.
Larger institutions have the operational capabilities to use different brokers that specialize in different markets, says Peter Plester, head of FX prime brokerage at Saxo Bank, who observes that for smaller institutions it is necessary to access multi-asset services from a balance sheet and operational perspective.
Working across multiple asset classes, combining FX prime brokerage, over-the-counter (OTC) clearing and listed derivatives/futures clearing as a single offering, is a no-brainer, says Fred Allatt, managing director for North America FX sales at INTL FCStone.
“It is a more capital-usage effective relationship for both, allowing clients to access multi-asset execution and clearing in one place, while the clearing firm can maintain a holistic view of its entire client portfolio,” he says.
A growing number of non-banks are also looking to provide research and listed derivative clearing services, coupled with electronic- and voice-execution services to reduce the product gap between non-banks and the tier-one prime brokers.
That is the view of Noel Singh, head of eFX business development at Sucden Financial, who describes electronic communication network (ECN) credit intermediation as a staple offering of non-banks.
“Clients can choose whether to source direct platform access or have their provider leverage their own connectivity to access anonymous pools of liquidity through ECNs and exchange-type venues,” he says.
Invast Global CEO Gavin White says consolidated reporting and collateral management can save clients time and money, which is particularly appealing to small and emerging managers who need to be frugal with their administrative spend.
“Consolidating a client’s multi-asset trading activity into one account, covering access to global exchanges and OTC markets is difficult for incumbent prime brokers,” he adds.
“Advances in cloud-based technology and moves toward automation have allowed the new prime brokers to build reporting and risk-management tools, which were unheard of a decade ago. But because of their size, the tier-one prime brokers struggle to update their technology with the same speed.”
For smaller FX prime brokerages looking to become intermediaries in the market, the barriers to entry depend to some extent on the service they are planning to provide.
For example, if the objective of a retail broker is simply to set up an FX spot feed and call it prime, this can be largely a branding exercise. However, for firms looking to provide a full service offering, there are a host of hurdles to clear.
“In the first instance, there are several technology barriers that need to be adequately managed, such as connectivity and risk-control technologies, as well as the need for a well-integrated and efficient back office that can give clients a real-time view into their positions and risk,” says Saxo’s Plester.
According to James Sinclair, executive chairman at MarketFactory, credit is a notable structural barrier to smaller banks becoming leading electronic prime brokers.
“Credit is a two-way process – two parties must have established a credit line to each other and each must also have entered that line into EBS and Refinitiv matching, as well as other platforms,” he explains.
“Those credit lines are typically entered by the trading side of counterparty banks, which have little interest in entering credit i