Hedge funds increasingly uneasy over impact of FX prime broker consolidation on liquidity

Capturing new or unique trading opportunities among the main reasons for 24% of hedge funds looking to change or increase their number of FX prime brokerage providers, finds Acuiti report.

As consolidation among sell-side providers of FX prime brokerage (FX PB) continues, hedge funds are growing increasingly uneasy about the risk of reduced access to liquidity, an Acuiti report has found.

This is specifically as a result of offboarding, a highly disruptive process which is also costly due to the process of finding and onboarding new prime brokers, highlighted by respondents as a significant drag. 

Over the past five years the number of prime brokerage relationships has been reducing. After internal decisions to consolidate, the next biggest contributors to this trend were existing providers withdrawing from the market, or firms having been offboarded by their existing providers, the Acuiti report asserted.

Of the respondents, 53% of respondents were ‘quite concerned’ and 16% ‘very concerned’ about the impact on their business a market withdrawals of one of their FX PB providers would have.

Notably, the Acuiti report found that more than a third of respondents did not have an executable back up plan in the event of being offboarded by core FX PB providers.

Aside from the impact on liquidity from these situations, Acuiti’s latest report – the rising risk of FX prime brokerage consolidation – also found that operational disruption from moving to a new provider is a key concern.

Ross Lancaster, head of research at Acuiti, said: “Hedge funds are highly reliant on their FX PB providers and it is no surprise that levels of concern are high across the market. There is an opportunity for expansion among the sell-side to meet the demand from hedge funds both to access unique trading opportunities in emerging and frontier markets but also to reduce operational risk associated with the dependence on specific providers.”

As it currently stands, 71% of respondents are currently looking to maintain their existing level of providers, while 24% considering changing or increasing providers.

Capturing new or unique trading opportunities among the main reasons for 24% of hedge funds looking to change or increase their number of FX prime brokerage (FX PB) providers, according to Acuiti report. Other key motivators were seeking to reduce costs (primary reason) leveraging the strengths of new providers’ offerings, and capital efficiency.

Read more – Market participants deep in preparation as FX market changes ramp up

For those hedge funds looking to increase their number of FX PB providers, another of the key motivations came down to achieving geographical diversification and accessing unique opportunities in the international FX market.

However, this could prove challenging if the market continues to consolidate, as Andy Ross, global head, prime and financing, financing and securities services, Standard Chartered, explained: “At the same time, with ongoing growth in the global market place, hedge funds from across the world are looking for a partner that can provide access to a broad spectrum of currencies to optimise their trading strategies.”

“The survey shows that hedge funds are encountering an increasing challenge in finding a prime broker for FX PB and firms have no executable back up plans in the event of services being withdrawn by their core provider.”

Acuiti’s report found that 61% of respondents highlighted that the ability to add any global currency to their tradable universe would enhance their trading strategies, “representing the desire to expand horizons, as opportunities in established markets are subject to increased competition. In a related finding, 38% of respondents said that they had missed opportunities as a result of not being able to rapidly and cost effectively trade a new currency or market.”

The prevalence of consolidation in this space has been a hot topic in recent months, with significant market moves from key players. Back in September, Cowen’s prime brokerage and outsourced trading business was acquired by Marex just six months after TD completed its purchase of the business.

The following month, TS Imagine and Cassini Systems announced a partnership as they sought to increase market share in the hedge fund and prime brokerage space. With the move, Cassini’s intelligent analytics across over the counter (OTC) and exchange traded derivatives (ETD) products now available via TS Imagine’s offering.