Winning on the western front: Western Europe – FX survey analysis
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Foreign Exchange

Winning on the western front: Western Europe – FX survey analysis

Western Europe is the key battle ground in the quest for supremacy in the global FX markets, asserts Jeff Feig, Citi’s global head of G10 FX.

It’s the biggest market, making up 43% of total volume in this year’s FX survey, and it’s arguably the most competitive. Furthermore, liquidity is also at its most plentiful during the European time zone. These two factors feed off each other. In 2011, Citi launched an all-out assault to drive up its volumes in the region, which resulted in a sizeable increase in its market share. However, it was coming from some distance back and couldn’t overhaul UBS and Deutsche Bank – the two dominant players in the region.

While UBS slipped one position to fourth in the global rankings, it can take some satisfaction in taking the bragging rights in western Europe. In doing so, it toppled Deutsche Bank as the leading FX provider for the first time since Euromoney began compiling regional rankings in 2005.

Each main region has its own characteristics. Western Europe’s defining feature is that, unlike North America and Asia, volumes are dominated by swaps, which make up 54% of the total, versus 39% in North America and 37% in Asia.

 source: Euromoney market data

While less profitable than spot transactions, it is seen as a way of generating spot business. Fierce competition in the swaps market has seen Citi more than double its market share, but, again, not enough to overhaul UBS as the number-one swaps provider in western Europe. Indeed swaps have traditionally been a strong product for UBS. Not this year. Its market share fell by 3%, while volumes year-on-year were slightly down, and along with its fellow Swiss-based bank, Credit Suisse, were the only banks in the top 10, to register declines in volumes in this year’s survey.

What enabled them to retain top position was the fact that the biggest challenge came from Citi’s concerted programme to drive swaps volumes, which saw its volumes grow 112%, as it rose from 7th place to 3rd.

This push by Citi has distorted market share in this year’s survey. UBS’s overall market share fell year-on-year, from 13.60% to 13.21%, though its modest compared with Deutsche Bank, which shed 1.46% of its share from last year to 12.4%, while Citi’s shot up to 11% from 7.04%.

The Royal Bank of Scotland also had a positive year, and was the only other leading bank, apart from Citi, to record a rise in market share, to 7.92% from 6.9%.

This represents the early signs of a turnaround in RBS’s FX fortunes, after losing market share in 2011 and 2010, and dropping to seventh place last year. “The green shoots of growth are always in your core markets,” says Tim Carrington, global head of FX at RBS.

That core market is the UK, which makes up 62% of the bank’s overall western European volumes, the highest ratio of all of the main banks, and where it boosted volumes 27%. Since Carrington joined in September 2010, he has set about developing a more customer-centric franchise, starting with its most traditional client base, the UK.

Stopping the rot in spot

While the standout changes in the rankings seem to be all about the ascent of Citi largely at the expense Deutsche and Credit Suisse, what has been a key contributor to UBS gaining the top spot this year has been the performance of its spot business.

The launch of UBS’s latest version of its single-dealer platform UBS FX Trader Plus has had an obvious impact, though it must be noted it wasn’t introduced to clients until the third quarter, and so the bank is keen to point out that spot had already gained momentum before the third quarter.

Indeed, UBS still managed to increase spot volumes by 29%, halting a three-year decline in its spot market share, just shy of Citi’s increase of 33% and Royal Bank of Scotland’s 31% jump. Meanwhile, Deutsche’s spot volumes fell 11%, although it remains the top provider of this product in the region.

For UBS, the improved performance is the result a two-year restructuring exercise since the bank hired Roberto Hoornweg from Morgan Stanley in 2010. He is now global co-head of UBS’s Securities businesses, with specific responsibility for fixed income, currencies and commodities.

Even though the bank had been ranked in the top three across multiple categories at the time of his hire, Hoornweg saw several issues with the way the business was structured, and set about making changes.

The extent of this restructuring has been underplayed, says Richard Longmore, who heads up EMEA institutional sales, and who was part of a group of former Barclays Capital FX bankers that joined UBS in 2010.

He says the appointment of joint global heads of sales and trading is one powerful element of the new business, which has now better aligned the objectives of the sales and trading functions.

Chris Vogelgesang (trading) and George Athanasopoulos (sales) were appointed joint global heads of FX in March 2011. Longmore says the benefits of this restructuring were always going to be felt in Europe first, before filtering into the other regions.

Better balanced

Western Europe is arguably the most balanced region in terms of client flow. Although still dominated by banks, which make up 38% of total volume, the remaining flow is more evenly distributed between leveraged funds, real money and corporates.

 source: Euromoney market data

To hold the position of top FX provider, a bank needs to be ranked in the top two counterparties in at least three of those four client categories.

UBS gained an extra top-two position this year (hedge funds), while Deutsche, which had three top-two positions last year, dropped two of those in this year’s results. Nonetheless, it still appears the strongest all-round franchise, ranking in the top four for all client groups. For UBS, it still remains underweight with corporates, where it failed to make the top four.


 source: Euromoney market data

Longmore tells EuromoneyFXNews that the overall objective is to be at least a top three counterparty with all the leading clients, not just in Europe but across the other regions too.

“Being top five with everybody might mean you can be top three overall, but over the long term the strategy has to be top three with everybody, and preferably number one with the top clients,” he says.

Across the client groups, UBS maintained its number-one position with banks, dropped one position to second with real-money investors (20% of total volume), as Citi stormed from sixth to first by more than doubling its volumes with this client sector.

“We have tactically reinforced within the banking space by strengthening the asset management space, which has allowed those more naturally focused on banks to do just that,” says Longmore.

While that managed to protect UBS against volume erosion, what made the difference in 2012 was leveraged funds, which account for 16% of total volume. In 2010, when Longmore joined his former Barclays colleague Athanasopoulos at the firm, UBS was more than 20 percentage points off the frontrunner, Deutsche Bank, with hedge funds, and 11 percentage points off second-placed Barclays.

source: Euromoney market data

Such an extreme gap for a bank that was still ranked second in the overall global rankings was a problem, which Longmore puts down to a misunderstanding of what the “flow offering” should represent for hedge funds. Longmore explains: “We’d got ourselves into a difficult situation where we weren’t able to deliver as much value to hedge funds as we would have liked. As a result, we weren’t as important to them and sometimes we got hurt. That in turn meant we showed them a poorer price, which led to a vicious cycle.”

UBS couldn’t shy away from aggressive pricing, but for the bank to be relevant to hedge funds it needed to deliver something other than price, which meant being willing to invest in hedge funds, partner with trading, and make selective investment in personnel, says Longmore.

The results show this strategy has worked. The gap between itself and Deutsche Bank has now been reduced to just over 5%, as it climbed three places to second this year, the only bank within the top five hedge fund counterparties to grow volume in 2011.

“There’s a common theme here: senior management getting out there and talking to clients, and getting the direct feedback on what is wrong and what is right, focusing on what’s not right and getting sensible people to talk to portfolio managers,” says Longmore.

The bank will need to boost its presence with corporates if it wants to stay ahead of its rivals, though. The margins between the top four banks are getting thinner.

While this is also the case in the US market, western Europe more closely mirrors the global market, where the top four players hold more than 10% market share. Competition will only become more fierce.

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