BNP Paribas Deepens CobaltFX Relationship
Posted by Colin Lambert. Last updated: July 2, 2024
With The Full FX View
BNP Paribas has extended its relationship with CobaltFX by deploying the recently-launched CobaltFX Analytics solution, which builds on the firm’s core Dynamic Credit product.
The United Fintech-owned CobaltFX says that BNP is now covering in excess of 100 counterparty banks across 12 ECNs and the use of the analytics package allows it to hone its use of credit even further by highlighting where it can be reduced, while at the same time expanding the bank’s ability to trade in the markets.
“We see this as an important initiative to address regulatory and industry body concerns about the over-allocation and inefficiencies of credit distribution on dealer-to-dealer venues,” says Joe Nash, head of global macro digital at BNP Paribas. “Moreover, this approach, combined with CobaltFX Analytics allows us to right size our limit for each counterparty whilst improving market access with them.”
Darren Coote, CEO of CobaltFX, adds, “This systemic problem has been long over-looked but there are a group of leaders in the industry that understand the benefits of this unique approach. We are very grateful for BNP’s leadership in this regard.”
What could this mean for the industry? Click below to find out.
The Full FX View
Has dynamic credit’s moment finally arrived? Achieving actual deployment in a major player (preferably more of course) is a crucial time in any project’s lifecycle and Cobalt has been on the cusp for a couple of years or more – effectively waiting for the connectivity work to get to a high-enough position in the banks’ work programme.
This now seems to have been achieved, with BNP Paribas headlining the deployment, but others also using what is an important risk reducing tool. Cobalt has long argued the point that over-allocation of credit, as well as carve-outs, is an inefficiency at the heart of the FX market, but it has taken a long while – and regulatory change, in for the form of capital rules – for the point to get home.
While the Dynamic Credit product has been live for some time, perhaps the crucial element now is the Analytics product that has been launched alongside, and is being used by BNP Paribas and others. Banks are now data-driven businesses and the data will no doubt be telling them they are over-allocating. Previously, any data indicating over-allocation would have been used to reduce credit to the market, but perhaps in a less-than-scientific fashion. With proper analytics, the reduction can be targeted, and implemented in a fashion that allows the banks to exploit the main benefit of smarter credit monitoring – more trading with important clients.
Time will tell exactly what benefit the analytics package will bring, but sources within CobaltFX tell me that the initial expectations of a 50% reduction in the credit that needs to be deployed are regularly being exceeded – sometimes to near 90%. This is important, not so much because of the benefits it brings the spot FX market – which are significant – but more for what it can bring to the forwards market.
The FX swaps market continues to inch its way towards a more automated market structure – more volume, especially in the short-end, is being executed electronically, and capital exposures are being alleviated through optimisation, but credit remains a bottleneck. It could be argued that dynamic credit solves a problem in the spot world, but offers a real opportunity in the forwards – it should not be forgotten that it is a concept that can work very well in the voice world as well.
Progressing the solution into the forwards market also opens up opportunities with clients. Netting and compression services aside, dynamic credit, by being positioned at the point of trade, allows LPs to interact with clients across venues, thus exponentially increasing opportunities.
There are those that believe dynamic credit will remove the need for optimisation services, I am not in that camp. At a high level, optimisation services remain important for markets, but the benefits it offers traders will be eroded somewhat by the fact that most runs take place days or weeks after trading. I sense that optimisation will become, in FX at least, a second string to dynamic credit – they will work together in reducing traders’ capital footprint, and increasing their ability to trade.
To date, dynamic credit has been seen as a product for prime brokers. It remains powerful for these firms, no doubt, but it also seems to be proving its worth for dealers more generally – and the ECNs. The latter is one area, incidentally, where dynamic credit could, potentially, have a negative influence, depending upon your view of fragmentation. The major dealers are concerned with fragmentation in spot especially, and will be extremely bothered if the same happens in FX swaps – being able to effortless allocate credit empowers smaller ECNs and could exacerbate that.
The increasing traction for dynamic credit as a concept, suggests that CobaltFX has reached another important point on its journey. Data speaks volumes, especially in today’s management mind; throw in the fear that a dealer is missing out on both an internal efficiency as well as an opportunity to grow their business without cost, and FOMO really cuts in, and demand grows. I suspect we are at, or close to, that point now.
As awareness grows, liquidity consumers should also become more curious. The chances are that a lot of counterparties don’t even realise they are benefiting from dynamic credit, but if a customer’s pricing has improved recently due to higher competition for their business, it could, in part at least, be due to those LPs having access to, and deploying, dynamic credit.
