In January, BNY Mellon confirmed that it was to introduce a prime brokerage service for its institutional clients. The technology is now in production and the bank is working with a number of pilot clients to ensure the service is ready when they are prepared to commence trading.
Michael Cooper, the bank’s head of FX prime brokerage, says it has chosen to enter the market at this time in response to client demand for access to the FX market. “The ability to net down collateral obligations and post-trade services with a single provider, while maintaining the flexibility of multiple bilateral trading relationships is a key requirement for many of our clients,” he adds.
The major banks have been redefining their priorities for some time, driven by regulatory reforms and particularly the capital obligations of the Basel III framework. In such an environment, the entry of a new player with an approach that is more sensitive to the market environment could have a disproportionately large impact, according to Gavin White, CEO of Sydney-based multi-asset brokerage and prime services provider Invast Global.
Gavin White, Invast Global
“It remains to be seen whether BNY Mellon will bring a new approach, but as the growth of boutique non-bank prime services firms proves, there is strong demand for more flexible multi-asset prime services which are priced at a point where small and medium-sized firms can access them economically,” he says.
According to BNY Mellon, the introduction of its prime brokerage service comes at a time when some clients are experiencing challenges in sourcing liquidity or are facing increased funding costs in a constrained market.
Noel Singh, head of eFX business development at Sucden Financial, suggests that for clients simply trading spot FX, the use of a prime-of-prime may enhance their liquidity experience. “Given the average daily volume prime-of-primes generate, their clients may enjoy a better pool of managed liquidity than if they had disclosed access to bank LPs [liquidity pools],” he says.
White refers to ‘temporary dislocations’ as clients adjust to the fact that banks are looking to pass on the costs of regulatory reforms, adding that a large swathe of clients in the small-to-medium end of the industry are finding that bank facilities are now either prohibitively expensive or simply unavailable.
“To their credit, the banks are doing everything they can to make the transition easy on clients, but the fact cannot be ignored that we are in a new paradigm – and it is a paradigm where small-to-medium prime services clients need an alternative to the traditional megabank facilities,” he says.
According to Cooper, BNY Mellon will be making “a number of further enhancements across our FX franchise during 2018,” although he did not specify which services will be affected.
It has been suggested in the past that a prime brokerage relationship is more efficient for the majority of users as it provides a portfolio effect for multiple instruments. Singh suggests this very much depends on the range of products the client may be trading. In the new era of client qualification, as long as the client has sufficient balance and/or they are paying their prime broker sufficient annual income, then prime brokerage will remain the most efficient choice for spot FX, he says.
Noel Singh, Sucden Financial
“However, for non-deliverable forwards and options the client may find they face additional funding requirements, as the prime brokers do not benefit from the portfolio effect – finding themselves with exposure against multiple executing banks and thus needing to place more initial margin/variation margin,” Singh adds.
White reckons the benefits of aggregation, netting, portfolio reporting and operational efficiencies enabled by a single prime broker relationship are as strong today as they were when prime brokerage began in the 1970s — especially for the small-to-medium end of the industry, where manpower and resources don’t allow for efficiencies of scale.
He says it is crucial to foster an industry that caters to the needs of small and emerging firms and adds that boutique non-bank prime brokerages are being gratefully received by clients who previously would not have imagined utilizing anything other than a tier-one bank prime broker.
“With the trajectory of bank-centric reforms likely to remain unchanged for many years [if not decades], the prime services industry is likely to further stratify over time, with non-bank prime brokerages providing a layered pathway up to the top tier banks,” he concludes.