Any Other Business…
Posted by Colin Lambert. Last updated: February 9, 2021
The problem with having, in the deep and distant past, a front office background, is that it can be difficult to accept that any other area can equal, certainly not more, importance.
I present this merely in defence of my fairly long held view that the big shift in the FX landscape in 2021 will be in FX swaps. Don’t get me wrong, I still think that the FX swaps market will be virtually unrecognisable in 18 months’ time compared to just 12 months ago, but the introspection that comes with idling away a couple of months also brings realisation that I may, not for the first or last time, actually be wrong.
In the first AOB I wrote that I wanted to start as I intend to carry on and those of you familiar with my opinions over the years will know that being wrong is not only an occupational hazard, but a fairly regular feature of my writings! Normally of course I would attempt to bluff my way out of changing my mind, but when you come up with two areas likely to see greater change, it becomes a little harder to do so with a straight face.
The uncleared margin rules (UMR) have long been on the industry’s horizons, therefore, in theory, the change we are seeing should be incremental and not dramatic. The problem is, however, that everywhere I look and a fair number of people that I talk to, highlights just how unready the buy side remains for this change.
This won’t be the first time the financial world has thrown its hands up in horror and claimed it can’t possibly meet a regulatory deadline – only to squeeze in under the barrier – but the sheer lack of preparedness on the part of asset managers seems to suggest they will lean upon their bank providers quite heavily in the run up to September 2021. This, in turn, skews bank project pipelines – client-centric organisations do listen to their clients after all – which means squeezing efficiency out of the system becomes paramount.
Third party providers are going to be a big part of that story, as is clearing, and that leads me to the other serious change I am seeing (or think I am), the utilisation of the post-trade space.
The early days of this venture have seen us report on several collaborations in the post-trade space at various stages of the process, but surely it can only be the first stage. There has been a period of innovation and competition in this area, but it seems that firms are now starting to realise that they cannot do it all and they need help – preferably from someone with a complementary service proposition.
Almost two decades ago I recall writing about a venture which I think (readers can correct me here) was called Socx, which at some stage involved Deutsche Bank. This venture effectively outsourced the back office function because it was recognised – even then – that processing is not really an area to differentiate oneself. Yes, problems can be solved quicker by well-organised firms and that in itself is a differentiator, but as automation levels grow further, these probably are either averted, or solved very quickly and easily by everyone.
Socx would not be the first venture to be ahead of its time in the FX industry, and it was driven by a realisation of the need for collaboration and, if I may use the word, utilisation in the post-trade space. Firms’ IP rarely involves their processing prowess these days so the more that can be standardised the better, and with that increase comes opportunity for third party firms.
I sense that these firms are working out that they are not going to be the “go-to” firm for everyone, therefore the only option is to scale up, hence the joint ventures we are seeing.
I have been fond over the years, as noted earlier, of making some pretty firm and fearless predictions. The fearlessness comes from no skin in the game, so we might as well start this venture with just such a prediction. What we are seeing now in the post-trade space is just the start. I believe that this ends up with three or four firms dominating in the post-trade space and little room for others.
Smaller firms rely upon innovation to get noticed and the sense is that in the post-trade space a lot of the innovation is done and opportunities to make a splash are limited. This will not always be the case of course, there will come a time when the giants that form over the coming years will need shaking up, but for now I suspect it is about collaboration and JVs, leading to a sustained period of intense consolidation.
Oh, and the FX swaps market structure will change quite dramatically as well!