NatWest Markets recognised in three categories in the 2021 Best Banks Awards

Winner: FX Markets Best Banks 2021 Awards

NatWest Markets was recognised in three categories at the 2021 Best Banks Awards, testament to the success of its strategy in refocusing on areas of strength and fortifying its relationships with clients 

  • Best bank for EUR/GBP
  • Best bank for FXPB
  • Best bank for post-trade services

To maintain its competitive edge in the FX marketplace and create a more sustainable business, NatWest Markets embarked on an initiative two years ago to strengthen its FX franchise. A fundamental part of this strategy was to focus on certain areas where the bank could best serve its clients and provide the most value for them.

Fabio Madar, NatWest Markets
Fabio Madar, NatWest Markets

“Clients know there is really no such thing as a universal bank,” says Fabio Madar, global head of FX sales and structuring at NatWest Markets. “Some banks seem to have everything, but they are not very good at everything. So we chose our battles and decided on certain areas where we want to be the best.

“I think this is the right strategy. By being honest with our clients about our areas of strength we’ve fortified our relationship with them and simplified all our discussions. We believe this is what’s best for our clients.”

As part of its initiative to reinforce its FX business, NatWest Markets decided to restructure its FX team by merging its electronic and voice desks, as well as promoting greater co-operation between the bank’s various entities. Two years on from its launch, the initiative has already yielded benefits. Madar explains that the merged trading desk can now consider a wider range of hedging strategies, by client type and market, than would have been possible with separate desks.

With an already varied clientele, ranging from mid to large caps, real money, private banks and hedge funds, the restructuring has made it easier to onboard clients between entities. As various businesses within the bank are working more closely together, there is now significantly greater internalisation of flows as well as more algo usage among clients.

“By merging the electronic and voice desks into one entity we have combined the macro know-how and risk management skills of voice traders with the superior understanding of liquidity and market impact that electronic traders possess,” explains Madar. “We also work much much better as a group now under the NatWest Group ‘One Bank’ initiative – part of which is focused on harnessing expertise bank-wide, removing complexity and thinking beyond organisational boundaries. There is no longer a power struggle between the desks to determine who should be quoting which business.”

Staying strong in sterling

Among the areas NatWest Markets has identified as being of strategic importance are the bank’s home market of the UK and the geographically and economically linked eurozone. Its concerted strategy to focus on the UK and Europe was recognised by market participants in the 2021 FX Markets Best Bank Awards, where NatWest Markets was voted the Best bank for EUR/GBP as well Best bank for FX prime brokerage (FXPB) and post-trade services.

“It’s extremely important for NatWest Markets to be strong in sterling,” says Madar. “It’s a very competitive space but, since it is an area of strategic importance for us, we have recentred some of our business to focus on the UK as well as Europe. We really want to play to our strengths on those currencies, and being recognised by market participants is the materialisation of a strategy we have pursued.”

As with other currencies in the FX market, the pandemic-induced volatility of early 2020 marked a chaotic period for sterling. The deterioration of liquidity led spot spreads in EUR/GBP to be four times higher than earlier in the year, at a time when they were already above normal levels following the December 2019 UK parliamentary elections. Liquidity conditions were particularly challenging as Brexit negotiations with the EU became extremely tense until the signing of the final agreement on December 24, 2020. 

As sterling is highly correlated to short-term interest rates, 2021 substantially increased the liquidity challenge for the currency. Liquidity provision remained a challenge for the sterling rates market, which translated into higher volatility for GPB compared with the rest of currencies in the market.

Looking to 2022, Paul Robson, head of G10 FX strategy for Europe, the Middle East and Africa at NatWest Markets, expects EUR/GBP to continue the downwards path it has been on for most of 2021. In part driven by diverging policy between the Bank of England (BoE) and the European Central Bank (ECB), equity portfolio flows in the first few months of 2022 will pressure EUR/GBP downwards towards the 0.80 level, something the market has not seen since 2016. Differing labour market conditions and other supply-side factors will induce further flows into sterling, which will outperform the euro in the early part of 2022 until UK interest rates become fully priced in and hints of ECB rate hikes become clearer later in the year.

Strategists at NatWest Markets expect that, in 2022, the BoE is likely to gradually raise rates – possibly to 0.75% by the end of the year – and the ECB will keep rates on hold while slowly decreasing its pace of asset purchases. 

Prime brokerage benefits without the overheads

FXPB has long been an exclusive facility reserved for all but the largest players in the market. In return for channelling large volumes of trades through their prime brokerages, these market participants are given the broadest access to the FX market as possible. Smaller players without huge volumes to provide banks are left with a lesser service and higher costs than the big players – until now. 

Marcus Butt - web.jpg
Marcus Butt, NatWest Markets

“Why should intermediate customers not get the same access as the big guys?” asks Marcus Butt, global head of prime services at NatWest Markets. “We already have the prime brokerage infrastructure with the capacity to offer our clients the best prices in the market, so why not extend that access to other clients?”

Recognising that such a service could set many smaller market participants on a more equal footing with the big players, NatWest Markets decided to leverage its well developed prime brokerage franchise to create an offering that provides many of the advantages of prime brokerage without the substantial overhead that it often entails. Because clients access the prime brokerage liquidity network through the bank’s segregated execution desk, they receive the best quotes from across the FX market.

The new segregated desk also functions very much like a prime brokerage relationship in that market participants do not go to market directly, but instruct the bank as to how they want their trades to be processed. They can ask the bank to find a certain number of quotes from the market or opt to consume NatWest’s price instead. Clients can thus leverage their existing relationship with NatWest Markets and outsource the execution of their trades to the bank while profiting from the netting benefits this entails, including the added legal, collateral and operational efficiencies.

As NatWest Markets intermediates the trades, clients don’t have to go through an onboarding process with banks individually, something that is especially beneficial for asset managers that conduct trades on behalf of a large number of separate legal entities.

“They can access pricing from the entire market, which is inherently better than the pricing they have received by being quoted directly,” explains Butt. “They just won’t have the overhead of a full prime brokerage relationship with the minimum monthly fees and all the required documentation. They can operate within their normal relationship with us directly, but have access to the broader market.”

While the service is still in its early days, Butt says the take-up is promising, particularly among asset managers that are currently subject to the uncleared margin rules (UMR) or that will be caught by the last phase in September 2022. Under UMR, these firms would need to create sub-accounts for every one of their clients with each liquidity provider with whom collateral is being exchanged, which could quickly lead to large numbers of accounts to create and manage, and at great cost.  

Maximum market access

“Our offering has a lot of utility for those firms in-scope under UMR, especially those required to open segregated collateral accounts with each of their executing brokers,” says Butt. “We’ve tried to make the logistics and overheads as low as possible for the client while offering them maximum market access. Among the spectrum of solutions that are currently available, we feel this is the best outcome for our clients when considering access to liquidity, operational overhead, overall cost and ease of access.”

The solution is extremely light-touch and flexible in that market participants do not have to commit to a minimum level of use. Rather, they can use it as little or as much as they wish based on their actual needs. It can thus be used as a stopgap for those firms going through the process of completing all the documentation needed to set up collateral accounts under UMR

Alternatively, a firm that only has infrequent demand for FX options can use the segregated desk to outsource the execution of that product to NatWest Markets while keeping cash products in-house.

“There’s no big commitment to using it,” highlights Butt. “It’s quite a flexible tool that the clients can elect to use in the circumstances that suit them best. It’s actually a very easy service for people to sign up to and use. If clients choose to use it, that’s great. If they choose not to, that’s okay too.”

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