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FX PB: Gaining currency

08 March 2017

Foreign exchange prime brokerage in Asia is a huge growth market with demand outstripping supply, giving newcomers everything to play for. Ceri Jones investigates

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.

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