TradeTech FX 2021: FX buy-side using fewer counterparties due to oversight

Speaking at this year’s TradeTech FX event, Aegon Asset Management’s Kirstie MacGillivray said the level of data needed to maintain oversight of a counterparty had risen significantly.

The buy-side is increasingly limiting itself to fewer sell-side counterparties in the FX markets due to the rising level of due diligence required to maintain oversight of them.

Speaking at TradeTech FX 2021, Kirstie MacGillivray, head of multi-asset trading at Aegon Asset Management, told the panel that due to the level of ongoing oversight required to onboard, and then oversee a counterparty, Aegon preferred to use a limited pool of sell-side firms.

“I think the biggest issue we on the buy-side have is the oversight that is required for counterparties. The due diligence required is almost a full-time job when taking on a new counterparty and then you have the ongoing oversight needed to make sure that counterparties are still behaving in terms of whether things are being settled appropriately and whether netting is happening as we expect it to happen. That’s why I tend to keep a smaller list of counterparties,” she said.

When assessing a counterparty for onboarding MacGillivray told the audience her firm assessed a bank’s behaviours including policies, how they digest data, the percentage of their volumes that are mid-matched and how much risk they internalise.

“You build up a picture over time and, therefore, you can have a more informed discussion with counterparties about where they are doing well and where they need to improve. It makes us all more informed about what we’re doing and how we’re behaving in the market,” she added.

The panel, which also included Stuart Brock, head of institutional sales UK and Central Europe (CE) at oneZero, Jay Moore, chief executive and founder at FX HedgePool, and Lydia Solinski 360T’s product manager for market data, discussed the rising demand for peer-to-peer liquidity in the FX markets.

MacGillivray noted the expense of unused credit lines with counterparties for the buy-side and suggested peer-to-peer liquidity was something her firm would consider utilising to avoid these.

“We have credit lines that we just don’t use and there is a cost in having those credit lines. Therefore, I think we have to be more actively managing the use of those credit lines going forward. I think that we will start to see changes in the buy-side behaviour around selecting counterparties. Peer-to-peer is very interesting for me as well as it is a source of liquidity that perhaps previously, we weren’t able to find,” she concluded.

In a recent deep-dive into peer-to-peer liquidity in the FX markets, The TRADE sat down with FX HedgePool’s Jay Moore to discuss the benefits for the buy-side of matching liquidity with their peers.