Deutsche Bank this year won Euromoney’s foreign exchange poll as the bank of preference for the highest volume of client business. Hal Herron, global head of foreign exchange, sees this as the culmination of a campaign which began in 1995, when Deutsche languished at around number 20 in the poll.
There’s no doubt, he says, that the advent of the euro worked in Deutsche’s favour. The euro became a global currency and Deutsche is a global player with a deep knowledge of European markets and the European client base.
The age of the niche currency player in Europe has gone. “Overall volume may have been reduced by the advent of the euro, but major institutions have seen a bigger share of the market,” Herron says.
Deutsche’s other two advantages have been its institutional client base – institutional investors have a larger proportion of global currency flows than in the past – and the increased use of currency options as a hedging and positioning tool. “In 1995 options revenue would have accounted for less than 5% of Deutsche Bank’s fx revenues, now the figure is more like 30%,” says Herron.
The US mutual fund industry is investing more and more abroad. Much of Deutsche’s foreign exchange business is related to securities transactions, with the foreign exchange deal leading or lagging the securities sale, purchase, or repo, depending on the market view. For such investors Deutsche has a team of risk strategists around the globe, advising on timing and positioning depending on the client’s time horizon and market view.
Deutsche’s website, fxmarkets.com, offers a combination of market intelligence on flows, and pricing tools, all in one place. “We do put Deutsche’s views on the site, but obviously not our proprietary positions,” says Herron. “Clients will have a variety of views, using the same intelligence, depending on their time horizon.”
How long can Deutsche stay ahead of the competition, which includes electronic trading platforms? Only around 2% to 3% of the business is going through electronic portals, says Herron, “and that will increase strongly, particularly for the smaller-ticket fx transactions. But in our view many bigger-ticket deals will continue to be done by voice, many clients continue to want an understanding of what is going on and to discuss execution. If you’re adding value, people want the contact.”
Credit continues to be a major differentiating factor in the fx markets. This is a barrier for those not experienced in credit analysis, as counterparties still run big daylight overdrafts. That happens less with securities transactions, but until the planned CLS (continuous linked settlement) Bank comes on stream, the big fx players will still be running these exposures. Aren’t the days of the big fx players numbered, however, as the markets become totally electronic. Says Herron: “This year will see the continuing development of the internet, and the commoditization of fx,” says Herron. That means it’s a dying business for some smaller players, but others like Deutsche are likely to continue prosper.
