FX as a service: five reasons why it is becoming popular

Regulation is raising costs within the asset management sector and heightening demand for more efficient trading operations. HSBC offers its Global Intermediary Services initiative, which can provide clients with a ‘wheel of FX services’

Reason number 1. Regulations and costs are reshaping the industry

There are two closely related reasons why asset managers are under unprecedented pressure to optimise efficiencies across the entire lifecycle of their trading operations. The first is that increasingly demanding regulatory regimes are shining an uncompromising spotlight on the value delivered by asset managers to their clients. The most notable recent regulatory milestone in Europe has been the second Markets in Financial Instruments Directive (Mifid II), which came into force at the start of this year, and impacts a much broader range of investors than the original directive implemented in 2007. Mifid II also extends best‑execution requirements to a wider spectrum of products, encompassing cash and derivatives fixed income, commodities and foreign exchange. 

At the same time, cost pressures on asset managers are intensifying. Investment in technology and diminishing fee income, twinned with increased competition from passively managed strategies, are all combining to erode profit margins across the industry. A recent analysis published by PwC, which notes that pricing power is being “squeezed across the board”, estimates that profit margins in the asset management industry have declined by 10% since the global financial crisis.¹

One notable by-product of this squeeze on profitability is that it is prompting investors to intensify focus on their core strengths. Part of this process is an increased scrutiny among asset managers of the optimal balance between insourcing and outsourcing. 

Reason number 2. The ‘wheel of FX services’, an increasing client demand

It is against this challenging backdrop that HSBC has been developing its Global Intermediary Services (GIS) initiative over the last 18 months, focusing on all the bank’s non-market-making activities in the FX market. “This initiative is aimed at providing clients with what I describe as a wheel of FX services,” explains Vincent Bonamy, who joined HSBC from Societe Generale to lead the newly created GIS business in September 2016. “We have put together a fee-based suite of services around the entire trade lifecycle, ranging from pre-trade and risk management services to execution, post-trade reporting and transaction cost analysis (TCA). 

“The intention is to accompany clients on a global basis throughout the lifecycle of each trade, enabling them to monitor their risk exposure in real time and providing them with different services each step of the way,” Bonamy says. “At the pre-trade stage, for example, which is an important part of the best‑execution process, we can provide guidance on the timing and sizing of trades, giving the customer the choice of voice or electronic trading. We also have analy-tics and netting capabilities, which are important at the pre-trade stage. We can then provide non-discretionary overlay facilities for clients choosing to outsource the risk management component of the trade.

“On the execution side, GIS offers benchmark algorithmic trading and execution,” Bonamy adds, “while at the pre- and post-trade level we can offer services such as TCA, which are becoming increasingly important in light of Mifid II.” 

Reason number 3. Risk management is still at the heart of investors’ preoccupations

Although it will support investors’ profitability by enhancing trading efficiencies and controlling costs, GIS was not primarily developed as a way of helping asset managers to use their FX exposure as a source of alpha. “That is not what GIS is about,” says Bonamy. “It is about identifying, understanding, controlling and managing the FX risks that can arise from any underlying transactions.” In other words, it is about risk management and execution strategies rather than performance enhancement.

Bonamy says that the GIS initiative is rapidly gaining traction among financial institutions as well as corporate customers across Europe, the US, in the Middle East and Asia for this very reason. “Some clients may only be using some parts of the overall service, which offers five key products broken down into 15 components. But the feedback we have had suggests that they are highly appreciative of an offering that allows them to interact with a single unit within the bank, rather than with several departments spread across the organisation.”

Reason number 4. Transparency, automation and added value all in one place

GIS is constructed around three key pillars. The first is transparency through the lifecycle of the trade. “Transparency brings with it the need to apply a much more rigorous thought process to how trades are executed,” Bonamy says. “This is because best execution is not all about pricing. It is also about how clients use data, which trading venue they use, and why they select one execution method over another.”

The second pillar is automation, which is increasingly regarded by investors as a prerequisite for implementing the algorithmic execution capabilities needed to maximise efficiencies and minimise the costs associated with building innovative trading strategies. 

The third pillar of GIS, says Bonamy, is added value. “There is a lot of value to be added on the execution and trade processing side,” he explains. “A simple example is the enhanced analysis of cross-asset correlation to identify the most efficient way of hedging an FX transaction.” 

Reason number 5. The trend towards end-to-end FX services

Bonamy acknowledges that, while other banks are adopting similar models to GIS, few are likely to have the resources, scale and global reach necessary to provide a service as comprehensive as the blueprint developed by HSBC. This, says Bonamy, is because there are no more than a handful of banks that can offer the two elements that are essential for success in this sphere. The first of these is a proven presence in each of the services that are key cogs in the larger FX wheel. “At HSBC, for example, we can offer FX services linked to payments, as well as to custody,” he explains. “These complement our comprehensive range of overlay and FX prime broking services.”

The second prerequisite for the GIS model, he adds, is a global presence stretching across all major time zones in developed and emerging markets alike. With a team of 35 spread between London, New York and Hong Kong, offering services in over 1,500 currency pairs, HSBC has an unrivalled global network.

The development of the GIS offering is aligned with HSBC’s continued presence as a top‑three FX global provider. “We recognise that we are still at the early stage of this journey,” says Bonamy, who adds that the next stage in the evolution of the GIS project may be combined pricing across its entire offering. “We are confident that GIS will evolve in line with client demand and help to strengthen our global franchise in the FX market,” concludes Bonamy. 

^{For professional investors and eligible counterparties only.}

For more information, please visit: www.gbm.hsbc.com/the-new-future

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