Best Bank Awards: ABN Amro

With the global foreign exchange market growing, and more market players looking for liquidity and credit facilitation, ABN Amro expects the FX prime brokerage (PB) market to expand in the coming years, either via traditional routes or prime-of-primes.

After the financial crisis, an increasing number of parties started offering FXPB services to clients to complement their existing services, says Michael van Dijk, product owner, FX at ABN Amro.

“The FXPB space grew, while credit and risk management did not develop at the same pace. After the Swiss National Bank event in 2015, risk management practices and controls were significantly tested, and consequently many PBs exited the space, which led to only a few major players remaining and dominating this market,” he says. “At the same time, we saw new entrants, particularly in the prime-of-prime space.”

With a smaller number of critical FXPBs dominating the market after the SNB event, the concentration risk increased significantly and a sudden exit by one of these parties would therefore have major consequences, in the bank’s view. This was witnessed recently when an important Tier 1 PB restructured its offering, suddenly leaving many major non-bank parties searching for a new provider, van Dijk says.

“It had a considerable impact, even though the major non-bank liquidity providers had already mitigated their dependency on a single PB by using the services of multiple PBs,” he adds. “With a number of Tier 1 PBs recently downscaling their business by increasing acceptance thresholds, some of their clients moved to different PBs. The landscape is now more diversified and this is probably not the end stage. It provides opportunities for a variety of PB services, such as prime-of-prime. Therefore, a diversified PB landscape appears to be more beneficial for a healthy market.”

ABN Amro believes major PBs are increasingly scrutinising their customers and focusing on keeping larger ones within a more diversified client base. Those who do not fit this profile will have to turn to a prime-of-prime broker, according to the bank.

“There are definitely opportunities for prime-of-primes to enter into the space, which traditional PBs are leaving. This may lead to further diversification of the PB landscape,” van Dijk adds.

Our structure is very transparent, offering our clients access to both bank and non-bank liquidity providers

Michael van Dijk, ABN Amro

Next to direct relationships with bank liquidity providers, ABN Amro Clearing runs what it calls a true prime-of-prime model, marked out by the quality of its credit intermediation.

“Our structure is very transparent, offering our clients access to both bank and non-bank liquidity providers, including a number of well-known electronic communication networks. We do not run any proprietary trading desk or in-house price feeds. As a neutral provider with a proper balance sheet, we are agnostic on which venues our clients trade and just make sure clients can access liquidity pools that best suit their needs,” van Dijk explains.  

“We integrate all FX business – both over-the-counter and centrally cleared – in our proprietary, sophisticated correlation haircut model, where we look at offsets against other asset classes, such as futures or exchange-traded funds,” he adds.

The bank is continuously expanding its liquidity sources to match clients’ requirements.

Looking ahead

Furthermore, ABN Amro Clearing, as a provider of exchange-traded derivatives, is well positioned for future developments in the centralised cleared FX space, according to van Dijk.

Referring to Bank for International Settlement figures showing FX volumes growth, he adds: “It will be interesting to see if the PB market will grow accordingly and which part will be covered by centralised clearing.”

Van Dijk anticipates an increasing regulatory push to centralised clearing, which will have an impact on FXPBs. This development is progressively affecting volumes for PBs, in particular non-deliverable forwards and options, but it also offers opportunities for PBs to onboard clients who have not needed a PB until now.

“The challenge for FXPBs is to find a good balance in pricing their services with regard to credit, regulatory cost, collateral and balance sheet requirements. With phase five [of non-cleared margin rules] on the horizon, the same is true for a large number of clients that need to evaluate the cost of carry in their portfolios,” he concludes.

The full list of winners of the 2019 FX Week Best Banks Awards