AWARDS Best prime-of-prime house: Saxo Bank

As the third anniversary of the seminal Swiss National Bank (SNB) event of 2015 approaches, the foreign exchange credit market is just about ready to return to normal. Following the unexpected discontinuation of the EUR/CHF floor on January 15, minimum requirements for accessing FX prime brokerage services have jumped significantly higher as prime brokers pulled back from smaller clients.

Costs for these services, which were once at rock-bottom levels, have gapped higher as the FXPB space convulsed. But the subsequent proliferation of prime-of-prime providers (PoPs) has been one of the dominant and lasting symptoms of the malady of that fateful January morning.

“I would say one of the big themes over the past 12 months has been a normalisation of FXPB,” says Lucian Lauerman, global head of electronic distribution at Saxo Bank, which has been voted Best Prime-of-Prime House at the 2017 FX Week Best Banks Awards.

“We have seen a return in client appetite from a few FXPBs and a few entrants in the FXPB space. And, importantly, three- and four-way agreements are becoming more straightforward again,” Lauerman says.

“It’s true that prime brokers are taking clients on again, but uncertainty around regulation and its impact is still keeping the tone cautious, so things are nowhere near what they used to be like before the SNB,” he adds.

There are a number of providers in our space who just stick the label ‘prime of prime’ on to a simple aggregated liquidity product, even though it is nowhere near a direct market access offering

Peter Plester, Saxo Bank

Throughout 2015 and 2016, PoP providers were pushing hard to carve out a permanent niche for themselves as an extra link in the credit intermediation chain. Competition has become fiercely price-driven while business models have diverged.

Peter Plester, head of FXPB at Saxo Bank, notes the level of understanding of what the term PoP means remains low, despite these companies becoming part of the market’s infrastructure.

“There are a number of providers in our space who just stick the label ‘prime of prime’ on to a simple aggregated liquidity product, even though it is nowhere near a direct market access offering – these ‘prime’ providers are frequently taking positions on to their own book,” Plester says.

Lauerman, meanwhile, says clients are unaware of some of the practices, which include first-looking flow or adding the provider’s own liquidity into the client’s aggregated pool. “Not all PoPs are the same,” he adds.

The unevenness in PoP business models could smooth out soon, however, as the need for extra intermediaries diminishes due to banks regaining their appetite for clients. This slowdown is demonstrated by the tapering off of new prime provider launches, as FXPBs relax their requirements and revisit the medium-sized client segment.

“We are increasingly competing with smaller prime brokers, as well as other PoPs,” Lauerman says. “But, as some clients who left us to return a short time later found out, our reach of liquidity, direct market access model and ability to process a high volume of tickets for low prices leaves us in a very good position for the future.”