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Custodians break into FX services with a new angle
IN JANUARY, BNY MELLON ANNOUNCED THE LAUNCH OF A FX PRIME BROKERAGE SERVICE, THE FIRST CUSTODI- AN TO ENTER THE SPACE. WILL THIS MEAN A NEW APPROACH TO FX PRIME BROKERAGE?
It is no secret that custodian banks are becoming increasingly involved in the front-office. With many of their traditional middle- and back-office activities commoditised, regulation and new client demands are presenting an opportunity for custody banks in new front-office frontiers. These opportunities are becoming increasingly prevalent in the foreign exchange space, where transactions that were previously uncollateralised have moved more into a regulated environment. This is providing an entry point for custodians. State Street, for example, has significantly boosted its FX execution capabilities over the last few years. The Boston-based bank has also made a number of investments into its FX execution platforms, such as Currenex and FX Connect, by bringing it closer into its client workflows. As part of its $ 2.6 billion acquisition of buy-side execution platform Charles River, State Street will look to align it with their own FX platforms and boost their front-office capabilities. Aboaf added between $ 35-40 million of revenue synergies will be achieved by integrating FX Connect, Currenex and Fund Connect into client investment workflows through Charles River. Yet only one custody bank has actually entered the FX prime brokerage market. In January this year, BNY Mellon announced it would launch a FX prime brokerage service for its institutional clients, culminating a series of investments into its FX markets team. Upon release of the service, BNY Mellon said it is looking to allow its client access to a new source of much-needed liquidity in the FX space. Furthermore, with the FX space becoming a lot more tightly regulated, there is a need for new firms with expertise in collateral management.“ FX prime brokerage allows clients to effectively simplify their choice of who they partner with for their back-office processing, and makes it easier to transact with a wide variety of counterparties through a single point of contact,” says Michael Cooper, head of FX prime brokerage for BNY Mellon.“ FXPB fits in with our wider custody services, and represents just one milestone in our continued investment in enhancing our FX capabilities. The aim is to ensure we are better connected to our clients from the front- to the back-office and we are providing them more efficient ways to trade FX.” Cooper highlights the onset of stricter collateral rules on uncleared derivatives, such as FX forwards and FX options, have impacted greatly on the costs of trading. For certain long-only fund managers that do not trade derivatives but do trade FX forwards, collateralising their portfolios will be new. For BNY Mellon, with a huge buyside clientele, being a custodian with a high credit rating makes it the perfect FX prime brokerage partner.“ Our FX clients want to centralise credit exposure with a very highly-rated counterparty. The tools we have at BNY Mellon to manage, segregate and optimise collateral makes FXPB a good fit to run alongside our existing fixed income and equities, collateral management and securities finance businesses,” adds Cooper. He explains the new FX prime brokerage service differs from the traditional financing and lending model of other prime brokers, and is more about providing credit and market access for buy-side clients.“ We allow clients to execute with multiple dealers or platforms, and then we step in as the credit intermediary and handle all of the post-trade workflow,” Cooper explains.“ We face the dealer for post-trade processing, we net the client’ s collateral exposures in a single place, the client benefits from a simplified legal framework and they no longer need an ISDA / CSA with every counterparty. We centralise all of their settlement, reconciliation and allocation processes.” The moves by both State Street and BNY Mellon in the FX space signal the changing way custodians are interacting with hedge fund clients. They are aiming to be more than an outsourcing provider, and instead, tie everything from the front- to the back-office together. The exit of legacy providers from the FX prime brokerage space, along with stricter regulations, has provided the perfect entry point for custodians.
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