The untangling of HSBC’s complicated FX world
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Foreign Exchange

The untangling of HSBC’s complicated FX world

If HSBC were to operate as a fully integrated global FX business, just how much more profitable could it be for the bank?

“I am disappointed regarding

the platform [delay], but we

have a complex business,

high aspirations and we are

dealing with it.”

Fred Boillereau

It’s a question many people outside, let alone inside, HSBC ask. It is already profitable, of course. In its annual results, announced last month, revenues from FX in 2011 were $3.27 billion, 19% higher than the previous year, and the best year since 2008. It was worth HSBC’s chief executive Stuart Gulliver highlighting, along with equities, the division’s strong performance in the bank’s annual report.

Volumes were also up, growing 23% in 2011, to $18 trillion – an increase, more or less, in line with the volume growth of its main competitors. So far, so good.

However, behind the scenes, for the past three years, Fred Boillereau, HSBC’s global head of FX and commodities, has been trying to turn what was a fragmented business – of G10 currency trading hubs and multiple local markets jurisdictions – into a one-size-fits-all global platform. The formal launch of its single-dealer platform (SDP) had been set to commence over the Chinese New Year. It missed the target.

“I am disappointed regarding the platform, but we have a complex business, high aspirations and we are dealing with it,” Boillereau said in an interview last month.

The more one understands the sheer scale of HSBC, and the nature of its heterogeneous businesses and infrastructure, the easier it is to understand what Boillereau means when he says “complex”. Furthermore, he has had to balance the cost of building an SDP, while also having to fund existing operations – all at a time when Gulliver is trying to shed $3 billion in costs by 2013.

Complex and bespoke

With FX businesses in 60 or more countries, HSBC doesn’t have a standardized downstream system, as each country’s system is unique unto themselves. Due to the bank’s federated model of independent balance sheets, creating a global model is problematic.

For example, if HSBC wants to convert the Brazil or Czech local treasury systems into a central system for payments, liquidity provision, orders and straight-through processing, it becomes a huge project for each individual country to create a unique interface with a global system.

“To do all of the integration to transact FX and then do the straight-through processing in more than 60 countries is complex,” says Joe Norena, who fills the multiple roles of global head of e-distribution and FX Prime, in addition to being Boillereau’s chief operating officer.

“The thing you have to realize

about HSBC is that we are

not a one-dimensional FX bank.

We truly are global and we don’t

take that lightly."

Joe Norena

Add to that the fact HSBC is trying to connect FX with every part of the organization, from its payments infrastructure to connecting its vast corporate franchise, large corporate customers and retail banking, and it becomes clear this is a mammoth task. “The thing you have to realize about HSBC is that we are not a one-dimensional FX bank,” adds Norena. “We truly are global and we don’t take that lightly. A lot of banks will say they’re global, but they don’t have that local presence, the local access to liquidity, and in times of crisis, that’s what really matters to clients.”

Local market domination

It’s a fair point, which was borne out in the qualitative rankings of last year’s Euromoney FX survey. HSBC made a clean sweep of the emerging markets, being rated best service provider for spot, forwards and options across the entire sector.

Across all markets, its market share increased by more than a third, the biggest positive year-on-year variance out of the top 10 banks in the survey.

Interpolating that, with reference to its 2011 volumes, Boillereau insists the bank has delivered a more competitive product in the past 12 months, which he hopes will translate into increased market share.

“We will be late on the overall programme – however, we have delivered a lot of additional value,” he says, citing healthy revenue increase. “That’s a lot of money.”

Boillereau puts that down to HSBC now capturing “greater-than-ever volumes”, and his sense is that client perceptions of the bank have further improved.

That’s the result of more competitive spot pricing, and better electronic price distribution via its application programming interface (API) and multi-dealer platform network. E-FX volumes were up 43% last year.

Led by Richard Anthony, global head of FX eRisk, the bank has rebuilt its pricing and risk-management engine. Now the risk is managed via algorithms out of its three main hubs: Hong Kong, London and New York.

Anthony’s team has also rebuilt the bank’s electronic pricing infrastructure and models, which first went live in late 2010 and are now in continuous enhancement. It is now live to clients via its API for liquid spot currencies in the middle of last year.


“I’m confident we’re now very

competitive electronically in the

liquid currencies and we’ve seen

that with an increase in volumes.”

Richard Anthony

HSBC will continue to add more products and functionality, such as non-deliverable forwards pricing capabilities, most notably in CNH, and expect to start distributing pricing through a its new API by the end of June. “I’m confident we’re now very competitive electronically in the liquid currencies and we’ve seen that with an increase in volumes 2009-2010 and another significant increase 2010-2011,” says Anthony. “We need to migrate clients over to the new architecture, which is ongoing. We should have full migration this year.”

That now means HSBC can handle additional clients, and service client segments electronically, that it wasn’t able to do before, because its electronic pricing, liquidity and risk management did not permit it, says Norena.

“These are the institutional clients, retail aggregator clients, which we couldn’t before service electronically,” he says. “Now that we’ve built a foundation, and are servicing them, we are starting to on-board them.”

While a lot of last year’s market-share improvement could be put down to the increased amount of votes from HSBC’s vast corporate base, there was already evidence the bank had made progress with institutional clients. Last year, it climbed three places to seventh with real-money investors.

Progress has also been made with prime brokerage clients as well. It is now live with 15 clients, up from 8 clients at the same time last year, with another seven close to being on-boarded, says Norena.

Final Execution

Foundation is the key phrase Boillereau and his management team use in the interview with EuromoneyFXNews. In layman’s speak, that means doing the basics right, before the final piece of Boillereau’s three-year plan can be put in place over the course of 2012.

He and his team define the past two years as a mix of tactical and strategic developments.

“Our tactical developments delivered the required increases in volume and profitability,” says Norena. “Our strategic development has largely been preparing the new foundations for our e-architecture, so the first part of 2012 we’ll be completing the build out, and in the second half we’ll be rolling it out.”

Whether the delay has caused reputational damage or not is debatable. Boillereau has always argued it is better to get it right first, rather than deliver in hope just for the sake of having an offering in the market.

The problems it has faced, some of them unique to HSBC, should not be intractable, but the pressures of rising technology costs and tighter budgets will always make strategy a juggling act. However, as always, it’s all about execution.

As the global head of FX at a leading bank recently opined on HSBC to EuromoneyFXNews: “The issue isn’t just about having the money to build and maintain. The issue for HSBC is the execution risk. Because when you’re trying to build something of that scale, your chances of getting it right are not necessarily that high and then it becomes a problem.”

While HSBC might have the desire to be a competitive player in G10 currencies, the world’s local bank sits on an undeniably nascent and potentially lucrative opportunity as the emerging-market currency turnover continues to make up a bigger proportion of total traded volumes. FX revenues from these markets now make up almost half of total FX revenues.

Paradoxically, HSBC is both the elephant in the room and the sleeping giant within the FX markets. Boillereau might not like such a phrase, but he knows the hard part – execution – is still to come.

He concludes: “This business is constantly evolving, and whilst what we have achieved so far demonstrates we are already a top FX bank, we recognize we have not yet achieved our full potential.”

This article was originally published by EuromoneyFXNews.

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