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FX Survey 2012: Against the flow

Every investment bank has spent huge investment dollars on FX since 2008. Now a shake out seems to be occurring. Banks with scale and budget are winning more share, but there are decent returns to be had for institutions of all sizes if they are focused.

Since 2008, foreign exchange has been a business to be in. That was also the year that industry-wide FX revenues peaked at a record high. Nonetheless, investment from banks to build flow-centric FX franchises continued apace for another two years. The prize? The most attractive return on equity of any global markets business on the street. Amid the backwash of the financial crisis, which perversely exaggerated FX revenues due to the extraordinary capital flow and counterparty risk that prevailed, it became clear that the days of liberal capital allocation were numbered. And as FX revenues skyrocketed, so did the return on capital. It didn’t take a genius to figure out that capital-lite businesses such as FX needed to be core, rather than ancillary, to the overall banking franchise, as they had been.

Suddenly, banks on the periphery of the Euromoney FX survey wanted to be in the top 10-ranked counterparties. Some set their sights still higher, to be top-three players. Before that, a small group that included Deutsche Bank, UBS, Citi and Barclays dominated the market.

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