The Last Look…
Posted by Colin Lambert. Last updated: October 12, 2021
What’s the state of the bank-client relationship? I ask because a couple of recent conversations included observations that it is not in the best condition – one conversant observed that “the buy side still don’t trust the bank” and another opined that the relationship “is as bad now as it was when the chat room saga burst upon the scene”.
It’s hard to really tell because the buy side is such a hydra, what I would say is that a lot of buy side people I talk to understand that the banks have to earn a living, but that is different to having a strong relationship. I actually think that some of the recent publicity around corporates chasing banks for compensation over FX derivative structures they have been sold has heightened awareness of the subject.
I have always been a little sceptical of the gushing approach by some banks when talking about their clients. Yes, they are “at the centre of everything you do”, and yes, you would be nowhere without them, but when some start waxing lyrical about how they listen to their customers and would do anything for them, I glaze over and the sceptic in me takes over. Absolutely, banks provide an excellence service for many of their clients, but they do so at a price – the are quite a few billion-dollar FX businesses in revenue terms out there, it’s not quite the charity some will try to suggest.
To refer again to the recent corporate-bank settlements and lawsuits over derivative structures, there seems little doubt that some players suggested certain products because there was a better revenue stream from them. I don’t for one minute believe these structures were sold in the expectation that they would blow up in the customers’ faces, but perhaps the risks weren’t explained quite as clearly as they should be. In what could be a strapline for the FX Global Code, I would observe that ‘disclosures do the minimum, and little more’. In the case of these corporate treasuries – indeed across the FX business, disclosures need to be reinforced by greater transparency of actions (and I would note that the Code does recommend that market participants make sure their clients properly understand the risks involved in prospective trades).
More generally, and away from what is really an ‘advice’ service, I am a little surprised in this day and age that, assuming my acquaintances are correct, there is that much trouble with the relationship, because everything is measured. Data and analytics offerings have improved to the degree that a bank can largely pin down the value to the institution of a client within a few thousand dollars, probably closer.
Of course, some parties in the FX world are less than keen to have light thrown upon how they conduct themselves – that alone is probably reason to end, or change, the relationship
Of course, the reason some are still dissatisfied is probably because they are still living in the 1990s and have what are now archaic attitudes. The right way to trade is not to line up 10 LPs and hit the lot at the same time (especially if you have said only you), equally, it is not the case that an LP should make money out of every trade. I also think these people are fixated on something that is fast becoming an irritant to me – the obsession with spread.
LPs should have the right to offer a spread, and if a client aggregates enough they are quite often going to see the spread eradicated – my point is that if you really care that much, spread is minimal. I don’t hold with people who argue that spread is a ‘tax’ on the client, it is a quasi fee for providing a service, there is a difference.
Also, as noted, LPs generally are not charities, they invest heavily to make sure that the client can access a reliable price at any time the market is open – that takes technology and people to build, maintain and monitor it, which costs money. The also offer a lot of ancillary services to make the clients’ lives easier, again, at a cost.
There is little doubt that in the past some customers paid way too much for the FX execution, they were ‘easy meat’. This is changing, which is only fair, but we should be careful as an industry not to push the needle too far in the other direction – there is a balance and that is why the relationship-orientated analytical tools out there are so important. Using these tools not only brings true transparency where it is needed, (in the process and not the order) but they enable all parties to understand what the value of the business really is.
Inevitably there are people who play around with the numbers, hence why there has been a growth in independent firms offering this service, and by the very act of trying to massage the data a provider is undermining trust in the entire sector – this is what needs to be stamped out. Equally, however, we cannot emasculate the LPs of the world, because as many clients have found out at various times over the past few years, when the smelly stuff hits the fan, most LPs are steadfastly in the market for their good relationships. I have a serious problem with some so-called LPs who do nothing but recycle prices and volume, but generally, if you look across the top 20 or 30, the majority – occasionally in specialist markets only which is their right – offer real value to the client, value that should be rewarded.
If, therefore, a problem does exist between clients and their banks, the first port of call for both should be an independent third-party provider of analytics. That will clarify the facts and figures and make everything that follows much easier. Perhaps, some parties on both sides of the fence are less than keen on the light this will throw upon how they act? In itself that should be a signal that the other should end the relationship, or at least shift it to a different footing.
So my argument has generally been, when faced with the observation that the buy side doesn’t trust the sell side and the relationship is bad, that all it needs is a little data and understanding and all will be OK. And then, as someone did a couple of weeks ago, people introduce excessive last look times into the conversation and my resolve disintegrates. There are some things that are just indefensible…