Prime brokerage: the price of excellence

The landscape for FX prime brokerage is undergoing a shift, as brokers continue to reallocate resources and re-price risk.

In the current environment it comes as no surprise that charging structures are under constant revaluation. According to one foreign exchange prime broker, the cost of providing service excellence has gone up, partly due to credit and operational risk. He points out that not only does FXPB provide an element of financial leverage through margin and counterparty lines, but also operational leverage, and the cost of renting operational leverage to clients has gone up.

"If there was a processing error when volatility is 15 instead of six, the potential costs go up. So clients are relying on you to process dozens or hundreds of transactions a day - any given one could have a problem at some point." When the underlying is trading on a much higher volatility, the potential cost of any operational mistake is obviously higher.

While the way this risk price is being passed on to clients is on a case-by-case basis, he noted that brokers are also being more discriminating about CLS versus non-CLS currencies - where there's no settlement risk versus settlement risk.

However, another FXPB has not seen the same rise in charges, although he notes they haven't been going down either. Instead, he says, people are looking harder at whom they will prime broke and who they won't prime broke. Part of the reason is an unwillingness to overload the credit and legal resources that are attached to the business, which would be better targeted at more meaningful clients. He says that if a client isn't trading a couple of $100 million a day it's unlikely they'll be offered FXPB services. "If you go and see a client and they say they trade $10 million a day in turnover, from a prime brokerage point of view it's virtually impossible to charge them enough money to make it a viable proposition."

Those benefiting from this shift are the second-tier prime brokers such as the Marexes and Newedges of the world, and retail trading platforms - which will no doubt be increasingly prevalent in results releases.

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