Global Custodian Hedge Fund Annual 2018 | Page 17

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Custodians break into FX services with a new angle

IN JANUARY , BNY MELLON ANNOUNCED THE LAUNCH OF A FX PRIME BROKERAGE SERVICE , THE FIRST CUSTODI- AN TO ENTER THE SPACE . WILL THIS MEAN A NEW APPROACH TO FX PRIME BROKERAGE ?

It is no secret that custodian banks are becoming increasingly involved in the front-office . With many of their traditional middle- and back-office activities commoditised , regulation and new client demands are presenting an opportunity for custody banks in new front-office frontiers . These opportunities are becoming increasingly prevalent in the foreign exchange space , where transactions that were previously uncollateralised have moved more into a regulated environment . This is providing an entry point for custodians . State Street , for example , has significantly boosted its FX execution capabilities over the last few years . The Boston-based bank has also made a number of investments into its FX execution platforms , such as Currenex and FX Connect , by bringing it closer into its client workflows . As part of its $ 2.6 billion acquisition of buy-side execution platform Charles River , State Street will look to align it with their own FX platforms and boost their front-office capabilities . Aboaf added between $ 35-40 million of revenue synergies will be achieved by integrating FX Connect , Currenex and Fund Connect into client investment workflows through Charles River . Yet only one custody bank has actually entered the FX prime brokerage market . In January this year , BNY Mellon announced it would launch a FX prime brokerage service for its institutional clients , culminating a series of investments into its FX markets team . Upon release of the service , BNY Mellon said it is looking to allow its client access to a new source of much-needed liquidity in the FX space . Furthermore , with the FX space becoming a lot more tightly regulated , there is a need for new firms with expertise in collateral management . “ FX prime brokerage allows clients to effectively simplify their choice of who they partner with for their back-office processing , and makes it easier to transact with a wide variety of counterparties through a single point of contact ,” says Michael Cooper , head of FX prime brokerage for BNY Mellon . “ FXPB fits in with our wider custody services , and represents just one milestone in our continued investment in enhancing our FX capabilities . The aim is to ensure we are better connected to our clients from the front- to the back-office and we are providing them more efficient ways to trade FX .” Cooper highlights the onset of stricter collateral rules on uncleared derivatives , such as FX forwards and FX options , have impacted greatly on the costs of trading . For certain long-only fund managers that do not trade derivatives but do trade FX forwards , collateralising their portfolios will be new . For BNY Mellon , with a huge buyside clientele , being a custodian with a high credit rating makes it the perfect FX prime brokerage partner . “ Our FX clients want to centralise credit exposure with a very highly-rated counterparty . The tools we have at BNY Mellon to manage , segregate and optimise collateral makes FXPB a good fit to run alongside our existing fixed income and equities , collateral management and securities finance businesses ,” adds Cooper . He explains the new FX prime brokerage service differs from the traditional financing and lending model of other prime brokers , and is more about providing credit and market access for buy-side clients . “ We allow clients to execute with multiple dealers or platforms , and then we step in as the credit intermediary and handle all of the post-trade workflow ,” Cooper explains . “ We face the dealer for post-trade processing , we net the client ’ s collateral exposures in a single place , the client benefits from a simplified legal framework and they no longer need an ISDA / CSA with every counterparty . We centralise all of their settlement , reconciliation and allocation processes .” The moves by both State Street and BNY Mellon in the FX space signal the changing way custodians are interacting with hedge fund clients . They are aiming to be more than an outsourcing provider , and instead , tie everything from the front- to the back-office together . The exit of legacy providers from the FX prime brokerage space , along with stricter regulations , has provided the perfect entry point for custodians .

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