Pl toronto 2015

PROFIT & LOSS EVENTS 2015

PROFIT & LOSS

TORONTO JUNE 3, 2015

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PROFIT & LOSS • TORONTO 2015

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The Profit & Loss Debate Conference Moderator - David Clark, Chairman, The Wholesale Markets Brokers’ Association; Honorary Past President, ACI – The Financial Markets Association Alex Jurshevski, Managing Partner, Recovery Partners Paul Ferley, Assistant Chief Economist, RBC

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Session 1: FX: A Market in Flux?

Joe Conlan, Global Head of FX Sales, INTL FCStone Markets John Miesner, Head of Global Sales, GTX James Sinclair, CEO, MarketFactory Takis Spiropoulos, Head of e-Solutions Group, CIBC Susan Gammage, Head of Americas Sales, FXAll

Are Non-Banks Ready to Fill Gaps in the FX Market?

As changing costs and regulatory pressures are forcing many banks to reduce their FX prime brokerage operations and retreat from their principal FX businesses, non-bank prime-of-primes are solving the former issue, but the non-bank market makers are not yet solving the latter, said panelists at Profit & Loss Forex Network Toronto.

John Miesner, head of global sales at GTX, and Joe Conlan, global head of FX sales at INTL FCStone, both said that their firms’ prime-of-prime businesses have attracted a lot more interest this year as the prime brokers at the banks have raised their fees in order to eliminate less profitable clients from their books.

“The phone’s ringing and the reason why it’s ringing is because the PBs at the big banks are asking a number of their clients to look for someone else to provide them with credit,” said Conlan.

He said that this trend had already begun before the moves in CHF on January 15, which resulted in sizable losses at some of the banks, because the ongoing regulatory requirements for banks have been more substantial than many predicted.

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Conlan added that before January 15, these firms knew that they needed to raise their PB fees, but that the SNB decision demonstrated that there was a lot more risk associated with providing credit than had previously been priced into the service.

One area where Conlan said that the rising price of credit in the FX market could have a significant impact is on firms that trade in high volumes with low margins, such as HFTs. “Some of the high volume clients that are doing algo trading are only making a couple of dollars per million and so if PB fees increase by a couple of dollars per million, then that business is largely dead and unfortunately I think that this could mean bad news for some of the ECNs,” he said.

Miesner commented that GTX’s prime-of-prime service is also benefitting from former clients of the bank PBs looking for credit services and noted that these clients’ expectations have changed in the wake of January 15.

“What’s interesting is that before the SNB decision, clients came to us saying that they wanted two hundred, three hundred or four hundred to one

TORONTO 2015 • PROFIT & LOSS

leverage ratios and we had to explain that’s not how it works. We probably would have given one hundred to one; however, the highest we will allow is fifty to one, and even that’s an exception. Ultimately, clients are coming back and agreeing to those terms. So there’s a new world order in terms of how clients are reacting to where they’re going to house their business and what kind of leverage they’re getting, with the idea that they can have access to the institutional market place,” he commented.

James Sinclair, CEO of MarketFactory, said that he expects the banks’ pull back from offering PB services to be a temporary measure.

“What happened at the large banks – and I do think it’s temporary – is that they’ve raised the criteria for whom they offer PB services to, they’ve raised the minimum AUM so high that there’s only a very small target market for them to go after,” he said. “Even what the SNB decision did to PB is temporary, because as PBs become more involved with better risk management techniques, such as the dynamic pricing of risk or pre-trade risk management, prices and criteria will return to normal.”

It is currently difficult for risk managers to model PB risk, according to Sinclair, because the SNB decision highlighted operational risk exposures and showed that the past is a less confident predictor of the future, while the current macro-economic

environment is unprecedented in financial markets, with negative interest rates being introduced in some countries. But as risk managers refine their models, the banks might release more credit lines back to the PB business and if they don’t, then prime-of-primes will fill the void, he added.

The panelists also discussed the impact of Basel III capital requirements, which they said are forcing banks to review their return on economic and regulatory capital.

It was suggested that the weight of these capital requirements could have a permanent impact on PB pricing, because the expense of running their business will go up, forcing the PBs to focus on higher margin business. The natural effect of this is that the smaller, lower margin business will move towards the prime-of-primes.

Sinclair also emphasised the impact that the impending Basel III requirements are having on the willingness of banks to take risk, with many banks and funds shifting from a principal risk taking business model to an agency model as a result of this regulatory pressure. He said that while nonbank market makers have become more active as risk takers in the FX market, they have not done so in sizes that compensate for those that were previously made by the banks and funds that are retreating from the principal business model. www.profit-loss.com

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Session 2: How is technology shaping today’s FX

Jill Sigelbaum, Global Head of Foreign Exchange & Alliances, Traiana Alan Schwarz, CEO, FXSpotStream

Fahad Qureshi, Head of FX Technology, BMO Capital Markets Techno Matt O'Hara, CEO Americas, 360T

Banks Look to Technology to Counter New Cost Pressures Both the regional and the top tier banks are looking for ways to deploy technology that will counter the impact of growing cost bases on their FX businesses, according to panelists at Profit & Loss Forex Network Toronto.

“You might say that technology and cost reduction don’t necessarily go together, but if the technology is executed and deployed correctly, then they definitely do. The result of this technology is that costs are reduced for the makers and takers of liquidity, this then has an impact on pricing and the transparency of the trade lifecycle increases,” said Alan Schwarz, CEO of FXSpotStream.

Bruce Wolf, head of sales – North America at EBS, commented that while the top tier banks will 8

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continue to spend on technology designed to help increase efficiency, he expects to see the secondary and tertiary banks start to invest in FX technology to help manage cost pressures.

“These pressures – whether it’s regulatory or credit costs – are going to continue and the banks will have to absorb them, so they’re going to have to change structurally how they manage their business both from a price making and a risk management perspective. The secondary and tertiary banks haven’t done that yet, and in EM countries the market is still very voice driven so there’s a long way to go,” he said.

Schwarz agreed, stating that he’s seeing increasing demand from smaller banks in Canada and Asia for new technologies to help manage costs. “There’s

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X market?

a

ology

huge opportunities for efficiencies to be achieved and costs to come down,” he said.

term disruptor to become a mid- to long-term business enabler,” commented O’Hara.

Fahad Qureshi, head of FX technology at BMO Capital Markets Technology, noted that it is now often the clients of the banks that are driving the discussions about FX trading technology.

He claimed that in emerging markets, some banks are currently reluctant to put clients on electronic trading platforms because they are concerned that it will have a detrimental impact on their relationships with these clients, especially if they are still trading over the phone with competitor banks.

“The market is changing and client expectations are not necessarily banking related. They log in for services online and they want to do things on their phone, they want to do things on the go and get prices and information right away. There’s an age of people who don’t want to talk to other people in order to conduct their operations,” he said.

However, Matt O’Hara, CEO of the Americas for 360T, highlighted concerns that some regional banks might have when investing in technology.

“Technology can introduce complexity and so then I think it becomes a question of whether it is a short-

“But I don’t think that this is what happens, because technology is actually a relationship enhancer, it allows the firms that invest in it to become more productive and they can become advisors to their clients rather than just execution providers,” he said.

Wolf argued that even as the big banks start to reexamine their business models in the light of changing cost pressures in the industry, smaller banks might be able to gain an advantage by investing in newer technology that isn’t burdened by various legacy technology systems. www.profit-loss.com

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Session 3: What is the future of cross-border trading?

Jamie Wilson, Managing Director & Chief Risk Officer for FX Products, BMO Capital Markets

Cocktail Reception

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Jesse Drennan, Global Business Process Engineer, FX & Commodities, HSBC Bank USA

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