A report by Patrick Graham of Reuters unveiled that big banks continue to turn away smaller hedge funds and currency trading operations. To that end, he quoted the head of prime broking at Denmark’s Saxo Bank as saying: “Major banks’ growing reluctance to do business with smaller hedge funds will stifle growth in the foreign exchange market.”
While the market has seen ‘prime of prime’ brokers pick up the slack in supply from the demand of smaller funds, it looks like this trend will continue as smaller brokers are able to still provide a high touch service to smaller funds and the business they bring is not a drop in the bucket like it may be considered at a major high street prime brokerage bank.
Saxo still predicts this trend could ultimately stunt Forex volume growth, Saxo prime broking chief Peter Plester was quoted in the Reuters piece as saying, “…much of their business has been picked up by firms like Saxo or Dutch bank ABN Amro, who target smaller funds, but the fallout is still likely to halt growth in the overall volumes pushed through the market.”
The article gave a interesting statistic from the most recent report by the Bank of International Settlements that said hedge funds were the main drivers in the rise in FX volumes from $3.3 trillion in 2007 to $5.3 trillion in 2013. With prime broking being their main way into the market, but after the 2008 meltdown of global markets, prime brokerage offerings fundamentally changed how they did business with much stricter requirements.
Mr. Plester went on to reveal that Saxo Institutional had benefited by providing risk management and other financial engineering that smaller funds can struggle to provide themselves. “We have seen around 30 new clients come to us to discuss coming on board in the past two months. It has become a lot more difficult for people to get credit relationships (at big banks).”