LEADER
They have further accelerated the
growth of Prime Brokerage, often
using Introducing Brokers, to
access markets and liquidity that
were previously reserved for the
interbank markets and in some
cases acting as a source of
liquidity as well. All these
factors have created significant
challenges and opportunities,
and for some firms capacity
constraints as well.
The Opportunity
There are many things that are
unique about the FX markets, but
there are some basic lessons that
clients are becoming the norm and the pace hascan be learned from the equities and futures markets
quickened requires a re-examination of processes forregarding the interaction between volumes and
Credit, Margin, Allocations, Confirmations,transaction costs. While most firms rightly think about
Reconciliation and even basic STP connectivity. Thesepost-trade improvements as investments in lowering
processes now require the collaboration of multipletransaction costs, risk and improving client service,
firms, in a market that has not adopted standardtheir impact on the market, when made in concert
with others, is to encourage the growth of the industry. approaches for many of these processes. In fact most
In every market, there’s a feedback loop between firms have historically sought to derive proprietary
lowering transaction costs and increasing volumes, competitive advantage from these processes, but are now
which presents further opportunities for streamlining, finding that, in a world where the buyside is seeking to
standardization and lowering costs and risk. diversify their relationships, sophisticated post-trade
needs and support for complex prime brokerage and
Clearing the bottleneck in post-trade processing will custodial processes are ‘minimum’ criteria.
not only reduce trading costs and operational risk but
will also open up new opportunities in online foreign Establishing a baseline set of best practices that can be
exchange trading. With lower trading costs, retail and shared by multiple firms is also beneficial for the
professional investors will be able to exploit trading industry. By streamlining processes, gaining common
opportunities which previously were not accessible. agreement among firms, and bringing real-time
Smaller trades on tighter spreads will become more connectivity across the trade lifecycle, operational
attractive, closing some of the liquidity black holes risks can be identified, reduced and eliminated.
that exist in the market today. By eliminating capacity
constraints and making trading simpler, cheaper and This belief drove the effort we announced earlier this
less risky, streamlined post-trade processes remove year--our joint venture with CLS. The initiative has
theimpediments to continued growth in foreign made excellent strides since the announcement of the
exchange trading. joint venture in April. Since announcement, four new
banks and leading prime brokers – Bank of America,
Moving towards a solution Credit Suisse, Goldman Sachs and Morgan Stanley –
have agreed to support the initiative, joining Citigroup,Banks across the industry are investing in improving
Deutsche Bank, JPMorgan and RBS as founding firms.internal systems and processes to handle these changes,
but internal efforts are only one piece of the puzzle.
The benefits of trade aggregation increase with eachMany of the post-trade bottlenecks lay not inside the
new bank that comes on board – any bank which hasbank, but between them. The adoption of Prime
Brokerage has created inter-bank processes where large flows from active, high-volume traders directly
previously client flows were managed internally. benefits from joining, while at the same time
Adapting to this new world where prime brokerage enhancing the value of other participants.
|24 october 2009 e -FOREX
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