Rabobank: the prime broker with all the right connections
When the market suspects the Swiss National Bank (SNB) has been active in FX, it looks for one name on the other end of a deal: Rabobank.
Yet the Dutch bank categorically refuses to comment on the activities of the SNB. However, it is widely believed in the market that as the SNB intervened in EURCHF, and the central bank then diversified it surging reserve holdings into the likes of USD, GBP, JPY and AUD, it was Rabo's prime brokerage arm that facilitated the trades.
If it is true, that would be a tidy bit of business for Rabo, considering the SNB's forays into the FX market saw its reserves swell to a record SFr429 billion ($456 billion) by the end of September, having been below SFr250 billion at the beginning of the year.
Peter Plester, global head of prime brokerage at Rabo, is the man behind the business.
A former spot trader at the bank, he says he set up the prime brokerage at Rabo six years ago when he realized high-frequency hedge funds were quicker at FX arbitrage than him and his calculator.
"We are considered one of the world's safest banks," he says. "As a credit intermediary, you can't get better, so it was a natural fit for us."
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It also turned out to be an inspired decision, as the financial crisis cut a swathe through the credit ratings of Rabo's competitors. The bank initially connected to Icap's EBS, then Reuters and now is linked up to 15 FX ECNs.
Plester sheds light on why Rabo has become a preferred counterparty among a wide range of clients.
It is Rabo's credit rating that gives its prime brokerage customers access to the best pricing on the FX market's leading dealing platforms, he says.
"On EBS and Reuters, we have close to 100% access, which is the best anywhere," says Plester. "So a customer can plug into us and they will end up with better pricing than the big FX banks."
Being able to access the best prices is one attraction of being a client of Rabo's prime brokerage business; another is not worrying whether the bank is going to collapse.
Unlike many banks, the Dutch co-operative did not need a government bailout in the wake of the financial crisis and although it has lost its AAA rating, it remains the best-rated FX bank on the street.
"We are still at the top of the stack," says Plester. "We are still considered the safest and still the highest rated among our peers."
He says the financial crisis has sorted the wheat from the chaff in the banking sector, with the difference in credit quality between banks now more marked than ever.
That has benefited Rabo's prime brokerage business, which has seen client numbers almost double in two years.
New customers have been evenly distributed among corporates, funds and banks, according to Plester.
He says, however, there has been a steady stream of new customer business from regional banks, some of which are not members of CLS. Those banks suffered in the wake of the financial crisis, as banks withdrew trading lines to non-CLS members.
"They just plug into us. They get a fantastic name and the best pricing, and they pay a relatively small fee for that," says Plester."We are very fortunate in that I can't find anybody that won't give us a spot credit line."
In a market that has seen falling FX volumes, Rabo says its prime brokerage volumes are up 40% on the year. As a business, it is a standalone revenue generator, not a complementary loss-making unit aimed at boosting volumes.
However, the bank's success in prime brokerage does have a spillover effect on the rest of its FX business, according to Plester.
"It definitely raises the profile of the bank in FX, and as a consequence people recognize Rabobank as the market leaders in the SME sector in the Netherlands," he says.
Indeed, in the Euromoney FX survey, which does not assign volumes to prime brokers, Rabo has made steady progress in recent years. It has climbed from 38th place in 2009 to 25th in this year's poll. In that time, it has overtaken Dutch rival ING to become the biggest FX bank in the Netherlands.
Rabobank FX turnover overtakes ING
|Source: Euromoney Market Data|
Rabo's core FX customer base is unsurprisingly, given its roots as a Dutch farming co-operative, in the food and agricultural sectors, with a large proportion of its FX profits coming from corporate customers. They include beer producers, cereal companies and soft-drink makers - firms that have links to agriculture. Rabo has a global presence owning banks in highly agricultural areas. It is, for example, the biggest bank in Paraguay and one of the biggest in Indonesia. It also has a large presence in Australia and New Zealand, and is one of the leading banks in wine-producing California.
"Wherever there is a concentration of farming, we are there," says Plester.
To service its clients, Rabo has its own single-dealer platform Rocket, which it built in-house five years ago and has just revamped. That ability to build IT systems in-house benefits Rabo's electronic-FX offering across the board, including prime brokerage, according to Plester, allowing it to respond quicker to clients' requests.
Most of its electronic business, however, is done across multi-dealer platforms such as FXall and 360T, which are popular with Rabo's corporate client base.
Plester says the co-operative structure at Rabo means the well-worn mantra of being client-focused is put into practice, something that reaps rewards with corporate customers - a profitable market segment that tops most FX banks' client target list.
"We work for our clients not for our shareholders, because being founded co-operative principles we look for a long-term relationship with clients rather than looking for short-term gains. That permeates throughout the whole bank," says Plester.