IFC invests in portfolio compression service for EM FX
Competition has become intense in the FX portfolio compression business in recent months, but until now the focus has been on more liquid G10 currencies.
This is now set to change as the International Finance Corporation (IFC), part of the World Bank, partners with portfolio compression service LMRKTS to help expand its activities in to emerging market (EM) FX.
Portfolio compression is still a relatively new phenomenon in FX, but it has become big business in short order as banks attempt to improve their capital efficiency by eliminating redundant bilateral and multilateral counterparty exposures.
By improving their risk profiles through compression, banks free up capital, which they can then use to lend to small and medium-sized businesses, says Andi Dervishi, global head of fintech investments at IFC.
However, while compression services have so far focused on developed markets, New York-based LMRKTS “can have an even bigger impact for emerging-markets banks where regulatory pressure and increased capital needs are compounded by the illiquidity of local markets”, he adds.
LMRKTS will launch its EM compression service in the third quarter this year for cash as well as FX options, with Motive Partners, a private equity firm focused on financial technology, acting lead investor, alongside IFC.
EM exposures will be compressed in bi-weekly runs, in contrast to LMRKTS’s G10 compression service, which is live and runs monthly.