Prime Brokerage Becomes More Elusive for Forex Brokers
In a year where the primary focus has turned to Risk, Banks continue to make it more difficult for Forex Brokers to attain a Prime Brokerage. A Prime Broker is critical for Forex Brokers looking to have an STP trade execution model. Through a system like Currenex or Integral, the Forex Broker can aggregate all of their liquidity relationships into one feed. The technology aspect while important is now becoming the least of the worries for those Forex Brokers and the focus has turned to capitalization, and other requirements banks have now instituted.
It is essential to understand that PB relationships and liquidity relationships are based on credit lines. As banks are protecting themselves and complying with stricter banking regulations, this becomes more challenging. Forex Brokers also need to deal with the added cost of ticket charges or transactions fees. This can impact the margins of a broker and for many make it a non-starter. Spreads continue to narrow, but the costs for many Forex Brokers continues to rise.
The mini prime or prime of prime options are not always attractive since many of these brokers have smaller balance sheets and may present an added risk for the Forex Broker. There have been some players that have stepped up their Prime offerings most notably Saxo Bank and FXCM.
Banks are also taking a lesser role when it comes to risk as more and more non-bank liquidity providers are emerging. While these hedge funds can act as a counterparty to replace some traditional bank liquidity they cannot offer they cannot provide the PB services due to regulatory limitations.
One of the most significant changes we are most likely to see as a result is a reduction in leverage offered by Forex Brokers. While this has happened as a result of certain regulatory jurisdictions (NFA in the USA) and Japan. The next wave of reduced leverage will come from the brokers themselves as credit lines decrease and capital requirements increase.