Foreign exchange market participants with long memories will recall that Standard Chartered was once considered to be a trailblazer in the industry. In the early 1980s it was one of the first banks to start trading currency options; and for a time it was the institution that brokers in particular used to go to if they wanted any products based on the European Currency Unit, the artificial construct that was to evolve into the euro.
However, as the market started to consolidate into the hands of a few big players around the turn of the millennium, the perception grew that StanChart was a spent force, at least on a global scale. Many dismissed it as a bank that had been reduced to a niche player catering for its clients primarily in Asia, the Middle East and Africa.
Although admitting that there was an element of truth in this, Richard Leighton, StanChart’s global head of FX, is swift to point out that the bank is a player in the industry. "I was amazed by the obvious potential the bank had when I joined in 2004," he says. Before that, he had spent 10 years at the organization that became JPMorgan, having joined Chase Manhattan from Midland Bank to set up an FX exotic option trading desk.
"Standard Chartered is a very different institution from any I’ve ever worked at before," he says. "The bank prides itself on being different, and by focusing on our strength we’ve really grown the FX business. If you look at our company reports, you’ll find that we have continued to report strong revenue growth in derivatives and FX. Last year, it was around 60%. How many other institutions can match that?"
According to Leighton, if the EuromoneyFX Poll was based on revenue generation rather than volume, StanChart would be ranked far higher than 21st in 2007. "We’re not a niche player, this business is far too big," he says. "In terms of revenue generation, I’m certain that we are very comfortably in the top 10 banks."
To an extent, StanChart has found itself a beneficiary of its historical position in Asia, the Middle East and Africa. But Leighton says that its success is not based on merely trading emerging market currencies. "We’re successful because we’re different," he says. "We do a load of emerging market business, including with non-emerging market players. But we also do a lot of G11 business with non-G11 clients. In India, we are doing a lot of dollar/yen, dollar/Swiss, cable and that type of business. There’s a bit of a misconception that we’re just an emerging markets bank, but we’re not. Last year, 50% of our options revenue came from G11. The spot and forward FX side is more skewed towards the emerging market side, but I’d think we’d be mad if we just positioned ourselves as an emerging markets bank."
Trade corridors
The bank is now capitalizing on its presence in the emerging markets as they mature and generate both inward and outward trade flow. "We have around 35 dealing rooms. There are not many other firms that have that," says Leighton. "We have 13 dealing rooms in Africa and 14 in Asia. Everyone is beginning to talk about trade corridors, for instance between China and Africa. We’ve been in China for over 150 years and in Africa seemingly for ever. We’ve got the contacts to facilitate this business."
However, at a time when the search for efficiency has become a business mantra, the maintenance of so many trading rooms raises the question of replication. "We’re always looking at that [replication], but in some cases the regulatory environment plays a big role. Often, we simply must have a local presence and the fact that we’re onshore in most of our core markets of Asia, Africa and the Middle East means we can access the local markets as well. That’s what the clients want to see and that links in very well with what we do in FX, especially options," says Leighton.
He still remains astonished about the impact Asian corporates in particular have on the options market. "I don’t think the market understands just how much volatility gets sold by Asian corporates," he says. "Our business model, in simple terms, is that we get given onshore by the local corporates and we get taken out on the other side by hedge funds and other financial institutions."
Leighton says this gives StanChart almost a unique advantage in the marketplace. "It’s a compelling story for me to tell when I visit hedge funds and say that 80% or 90% of the time I’m going to be the best offer in the market because of the amount of inventory I get, and that’s in G11 as well as emerging market currencies," he says. "What many funds now realize is that to get stuff done through us is often a little bit less noisy than through some of our competitors."
Looking ahead, while many predict that currencies such as the Chinese renminbi or Indian rupee will join the ranks of the majors, Leighton points out that history does not support such an argument. Instead, customers in emerging markets are more likely to trade the existing majors more extensively than play around in their domestic currencies. "What’s interesting is that, from the regulatory side, lots of local customers cannot trade exotic products on their local currency. The central bank regulates that. But to a large extent they can do what they like in other currencies, like dollar/yen. As markets open up, these clients will migrate towards the most liquid products. We aim to be the number one service provider in the majors in these markets," he says.
Leighton acknowledges that even though StanChart is present in numerous markets others simply cannot reach, distribution is becoming increasingly important. "We recognize that e-commerce is an important area for us. To an extent, we’ve had to play catch-up, but that has benefits," he says. "We’ve been able to learn from the mistakes that other people have made. We’re not prepared to turn on the machine and see revenue disappear. Ultimately, we intend to be the market leader in our geographical regions in all currencies. The bank’s mantra was to be the best in Asia, Africa and the Middle East. But we’ve changed that to being the best for and in Asia, Africa and the Middle East. It’s a subtle difference but it shows that we want two-way business. It’s clear we cater for the client in India who wants to trade euro/dollar, but we’re also there for the guy in the US who wants to do stuff in Korea. E-commerce will facilitate that.