Currency markets in a post credit crisis world (Part one)
Delegate biographies: Learn more about the panelists
Executive summary
• Demand from corporate clients includes both FX technology to facilitate cash management and products that enable effective hedging
• M&A-related FX transactions are expected to keep growing as M&A activity will remain buoyant in emerging markets
• Demand for prime brokerage is growing and a well-organized prime brokerage service gives a bank a competitive edge. Corporates are increasingly using prime brokerage-type services
• Price differentiation in prime brokerage is growing to take account of different degrees of risk and transparency among customers
• Algorithmic trading in the FX market is incapable of offering the same sort of advantages it has given in the equity markets.
• It will be possible to generate FX alpha for a while longer but much of the alpha is being ‘beta-fied’ into commoditized products using algos or indices |
SB, Euromoney Clearly financial institutions and asset managers have been the focus for the last few years. But what about the corporate client?
JS, Deutsche Bank At Deutsche Bank our corporates are taking us down two different paths of product development. One type of client wants us as a technological provider, to work with them on integrated cash management, which involves FX and the use of our technological backbone. The second type of client is asking us to take different types of risk than we’ve taken before, risk in which the FX is linked to sometimes extremely illiquid assets, such as corporate finance events, and they are also demanding more complex structuring of transactions, for example to create certain accounting events. So clients are asking for two distinct, highly specialized services from us.
SB, Euromoney How does that service relate to the cash management or prime brokerage businesses?
JS, Deutsche Bank Prime brokerage is very similar to the business we want to do with corporates. What is the core competency that the client wants from us? Whether it involves credit, settlements or the fact that we’re in so many countries, the corporate client wants our backbone.
EP, UBS Corporates continue to be innovative with respect to derivatives; they continue to be among the largest users of average rate options for example. Whereas hedge funds favour barrier-type trades to express a view, corporates typically use derivatives as a risk overlay. And remember, fundamentally options are insurance products – they become more interesting as volatility increases. We therefore expect continued volume growth.
CK-G, Société Générale I think IAS 39 in January 2005 changed the landscape quite dramatically for corporates. Accounting impacts were transferred directly to equity valuations, and so the speculative side of the business almost collapsed overnight. Traditional sales coverage now focuses on yield-enhancement or on cash management, treasury and providing a total service as has been described. That means, for example, handling cross-border M&A transactions and generally following your client around the world. On the hedging side for translation risks, the current level of the euro against the dollar is very interesting. Corporates expect the euro to start giving ground here and the dollar to appreciate, just look at the volatility skew of buying a euro put, versus a euro call. I suspect right now if we were to see a break through the lows in the dollar, we would all be providing a lot of support for corporates to hedge that weaker dollar which they don’t expect.
RB, Investec We know that volumes in FX markets have grown a lot over recent years. Has corporate volume grown at the same rate, at a lower rate or faster?
JS, Deutsche Bank Our corporate line has definitely not kept up with the algos. One client once did 64,000 tickets in a day with me on the algo side. There aren’t a lot of corporates that can book that many tickets in a year. Another issue is that corporates are looking for a larger commitment from their partners. They’re not expanding their staff and they’re always trying to trim back. They’re looking for partners that will be there for them, not just as an FX provider. It’s a challenge to be that type of full broad participant with that type of client.
SB, Euromoney Are corporates looking for banks to help them navigate the new regulatory burdens?
JS, Deutsche Bank Banks are required to fulfil their duty in terms of appropriateness of the product for the client. That responsibility’s been there for the last 15 years and should be there for ever. Our clients have digested IAS 39 and FAS 133 and they have adopted a VAR approach. So they will look at what is the benefit of the product we’re showing compared with the cost of the additional accounting VAR. Does the trade make sense? That is becoming the way the clients look at these trades.
HB, JPMorgan Chico, you mentioned M&A flows and M&A transactions. My perception is that those are very episodic. You might get one or two and make a lot of money. Will we see more or less of that in 2008?
CK-G, Société Générale The growth of revenues from M&A transactions has pretty much matched what I would call the pace of globalization. If you expect globalization to continue, as we do, so will the pace of M&A transactions. We will see mega-mergers in the developed world, and a plethora of opportunities in emerging markets. We are very focused on emerging Europe right now and will capitalize on our own acquisitions in Russia.
VD, Bank of America We’re seeing the same things at Bank of America. Deal-contingent trades today, while not vanilla, are certainly much more common and books are running them. But delivering the bank is still very important – an accounting expert, a portfolio, an analytics person to look at the balance sheet – and they realize especially in this dollar environment that their dollar risk is non-linear. As the dollar changes, their business changes, so they can’t just look at what their exposure is today.