Greenwich Report Finds Choosy European Customers and Dealers

The latest Greenwich Associates report on the foreign exchange and risk management business of European financial companies and corporates shows a "subtle but significant" shift in the relationship between buyers and sellers of treasury services.

The shift affects both sides of the equation and reflects a "choosiness," whereby customers are cutting down on the number of dealers with which they do business and dealers are likewise shortening their customer lists, says the report.

Connecticut-based Greenwich drew its conclusions from more than 1,600 interviews with treasury executives in 13 countries: Belgium, France, Germany, Ireland, Italy, the Netherlands, Denmark, Finland, Norway, Sweden, Spain, Switzerland and the U.K. The interviews were conducted between December 1993 and February 1994.

The 1994 survey is comprised of financial institutions, which include fund managers, pension funds, insurance companies, investment banks, building societies and other financials and of corporates, which include industrials, wholesale and retail trade, transportation, utilities and construction groups.

A Greenwich report released earlier this year on North America found that total foreign exchange volumes had increased, but that the value of obtaining corporate business decreased while getting that of fund managers was of growing importance to banks (FX Week, January 10).

As countries emerge from recession, the Greenwich report finds that the trend towards fewer business relationships may slow as credit begins to ease. According to Greenwich vice president Frank Feenstra, difficult economic times force customers to emphasise their bank relationships because of a need for "credit rather than counsel."

Meanwhile, once the constraints of recession are gone, Continental companies will go back to comparison shopping, according to Greenwich principal Robert Statius-Muller. Pointing to the U.K. as an example, partner John (Woody) Canaday says that the "pendulum will swing back toward banks that offer expertise in particular foreign exchange or risk-management activities and away from a predilection for using house banks in virtually all transactions."

Greenwich found that Continental companies use an average of nine banks instead of 9.3 in 1993, while U.K. companies average 8.7 banks versus 9.3 a year ago. But at the same time, top dealers have also cut down on the number of customers they deal with, by a four to one ratio. According to principal Steve Glick, "dealers are saying that if they don't get the kind of business they want from a given customer, they let the phone ring instead of making the phone call."

Another interesting finding is that, as currency volatility declines, an increasing number of FX managers on the Continent are now trading forex for profit rather than purely as hedging or protection. Greenwich found that 47 per cent of FX users trade for profit, compared with 39 per cent in 1993. Fifty-two percent of the respondents said they expect to trade FX, with profit in mind, over the next two years.

Currency options are also gaining ground in terms of significance in the customer-dealer relationship. Not only is use up, but so is the attraction of banks that offer a degree of expertise. Currency options are used by a little more than two out of five forex managers in Europe, says the report. Forty-five per cent of Continental European institutions use currency options, while 33 per cent do in the U.K.

European and U.K. FX managers executed nearly $300 billion in currency options trades during the past year. On average, says the report, institutions in Ireland, France and Switzerland are the most active FX options traders. Fund managers are the biggest users of FX options on the Continent, at 45 per cent, versus 33 per cent in the U.K.

A mere three per cent of respondents' FX options trading is done on exchanges; the rest is executed over-the-counter. Furthermore, 92 per cent of all their options business is short-dated - less than one year. U.K. industrials are the most active users of options beyond a year. More than 80 per cent of respondents' total options volume is in simple options, while more exotic options account for 15 per cent on the Continent and 10 per cent in the U.K.

Half the institutions surveyed, however, said they turn to options to cover anticipated payables or receivables, says the report, while financial institutions use currency options primarily to hedge currency exposure and to speculate on the market. Arbitrage is only a minor use of currency options, says the report.

Corporations and non-bank financials transacted total annual volume of more than $6.2 trillion this year, up from $4.5 trillion in 1993. But Greenwich notes part of the increase is due to the survey's expanded coverage of non-bank financials, fund managers and pension funds in particular. When similar samples are compared, the increase is more modest, to $4.26 trillion, from $4.15 trillion.

Average annual spot trading volume by end users surveyed declined 20 per cent, to $3.5 billion from $4.4 billion during the comparable period. Their outright forwards volume decreased only four percent, to $4.7 billion, from $4.9 billion. Their FX options volume increased, however, to $1.4 billion, from $1.2 billion, a 17 per cent rise.

Respondents' trading volume on the Continent is dominated by U.S. dollar-based transactions (41 per cent), while 59 per cent is executed in cross-trades. Of the U.S. dollar-based trading outside of Germany, 53 per cent is against the Deutsche mark. Fifty-two percent of all their trading in Europe includes the mark.

French and Spanish institutions, as well as chemical and pharmaceutical companies and oil, gas and mining companies mainly use the U.S. dollar. Belgian institutions are most active in cross-trading, with only 15 per cent of their volume in the U.S. dollar, says the report.

Special products used by respondents are dominated, 90 per cent, by forward transactions under one year, followed by FX options under one year (used by more than 50 per cent). FX options they traded on exchanges were up one per cent this year to 12 per cent and FX options of one year or more dropped by three per cent to 17 per cent. Derivative currency options use increased by five percent, to 28 per cent this year over last.

Also under the special products heading, use of netting agreements dropped by 11 per cent to 29 per cent of those interviewed. Use of FX investment funds were at a mere two per cent. Twenty-nine per cent use technical trading models, 44 per cent use fundamental analysis of currency markets and 29 per cent are active in 24-hour trading.

Cross-border trading accounts for 59 per cent of the $6.2 trillion traded on the Continent. Responding financial institutions conduct 77 per cent of their total trading volume in foreign centres, says the report. But while the volumes have increased, the number of companies conducting cross-border trading actually fell. Use of North America fell 13 per cent and use of London fell six per cent. Interestingly, however, trading into the Far East doubled.

Competitive pricing in the major currencies was the number one reason (cited by 51 per cent) for cross-border dealing. Other reasons include being able to execute large trades without moving the market (29 per cent), more competitive quotes in minor European and exotic currencies (27 per cent), diversification of sources of FX services (27 per cent) and more consistent quotes in volatile and flat markets (26 per cent).

In evaluating dealer effectiveness, Greenwich found that 29 per cent of institutions appreciate being kept informed of changes in the currency markets. But this is less important to those institutions that trade less than $5 billion annually, who instead rate more highly the depth of the relationship and understanding of currency needs. Fund managers and pension funds, however, stress the creditworthiness of banks and accurate settlement and delivery, says the report.

Competitive prices are the most important trading and execution factor in dealer evaluation for the second year in a row, cited by 64 per cent. Promptness was second, although down two per cent year-over-year, to 51 per cent. Consistency of quotes was third, up two per cent, to 36 per cent. Fund managers and pension funds rate speed of quotes ahead of competitiveness, notes Greenwich.