BNY Mellon spearheads South Korean FX prime brokerage emergence as international aspirations loom

BNY Mellon may not be among the very top FX prime brokerages in terms of global market share, however its recent foray into South Korea by opening a trading room in Seoul is symbolic of its APAC aspirations. The bank is clearly not just looking to provide Won liquidity to a local market, but instead is using South Korea as an APAC springboard for global FX order flow at Tier 1 level

South Korea has been so far a slumbering giant among interbank FX participants.

Whilst the entire world looks toward London for its Tier 1 prime brokerage relationships, 49% of all global FX order flow being handled by just six banks that nestle along the docklands area at Canary Wharf and distributed via aggregated liquidity feeds from prime of prime brokerages, many of which are also based in London, to a vast global retail FX market.

London’s Tier 1 interbank FX market is absolutely dominant, and the largest FX dealers in the world steadily dominate, however the growth of the institutional sector in the Asia Pacific region has led to minority market share increases from global banks usually of North American or British origin in important financial centers.

Yes indeed, the vast majority of interbank FX business conducted in the Asia Pacific region remains the preserve of London’s interbank execution and clearing divisions, however Hong Kong and Singapore are home to several major read-across operations of the same banks which are responsible for APAC order flow.

Whilst conducting research in mainland China in the summer, FinanceFeeds concurred that China’s own banks, all of which are owned by the state, are massively well capitalized and have a very clever model indeed.

They do not expose themselves to risk, and they have assets which consist of property, cash, investments in company stock and indices that are so enormous that it is hard to quantify.

These banks, unlike the weary western banks, will extend counterparty credit to FX brokerages in China without the blink of an eyelid over risk.

Western banks are already wounded enough and are restricting what they can see quite transparently. It would be futile for a Western prime broker with no presence in mainland China to go to a Western bank’s eFX desk and ask for a large prime brokerage deal because of a massive Chinese partner that has been onboarded.

There is no way for the bank to check how large and how well capitalized that firm is, as one is one side of the firewall, and the other is, well, the wrong side.

How can the major FX tier 1 dealers in London such as Barclays, JP Morgan, Citi, Deutsche Bank and HSBC as listed in the chart above have such a lowering market share, yet still be favored.

This is because China is entering the global arena via the back door. Of course, domestic FX industry executives in China know that only RMB liquidity can be offered at good rates and good execution by Chinese banks, the rest is foreign, and anathema to the Communist government, however looking at South Korea’s FX order flow figures for the past three months tells the story exactly how it is.

The daily FX turnover by local and foreign banks in South Korea rose 11.9% in the first quarter from the previous quarter, and the daily FX turnover averaged $49.98 billion in the January to March period, compared to the previous quarter’s $44.66 billion, according to the Bank of Korea.

So what? Well, South Korea is becoming an area of opening to the world for China’s FX liquidity. South Korea and China launched a direct exchange market for their currencies in December 2014, meaning that Yuan can be exchanged directly and then traded in other currencies and against other currencies by local and foreign banks in South Korea.

This has now been taken up by many participants and the daily trading volume of FX spots reached $19.41 billion in the first quarter of this year up 11.8% from the previous quarter.

Thus, South Korea itself may not be the originator of Tier 1 liquidity per se, but it is one of the outposts for Chinese connection from banks to the outside world, and is eating into global market share whilst said banks are unburdened with the woes of Western stalwarts.

As last year drew to a close, Singapore continued to dominate as the largest FX center in Asia for Interbank dealership.

The average daily trading volume of Singapore’s FX market was US$517 billion in April 2016, up 35% from US$383 billion in April 2013. Singapore’s share of global FX volumes has grown to 7.9% in 2016, from 5.7% three years ago.

Indeed, this dynamic has now continued, and this week, BNY Mellon opened a foreign exchange trading room in Seoul, South Korea, to provide liquidity to domestic clients seeking exposure to major global currencies and counterparties looking to trade the Korean won.

On February 9, the bank announced that the Seoul FX Trading Room enables currency market participants to benefit from more efficient pricing and enhanced liquidity as they conduct regional and global trading.

As investment managers take an increasingly proactive role in handling their currency exposure, BNY Mellon began restructuring its FX business in 2016 to make it more service-oriented, instead of a passive adjunct to custody.

The bank made the changes in response to its customers’ growing need for greater transparency and risk-management tools. BNY Mellon Global Markets now includes the bank’s FX business, as well as capital markets, and recently BNY Mellon announced an expansion of its global payments infrastructure by adding more FX payment capabilities.

Indeed, this may appear very much a regional development, but actually BNY Mellon’s aspirations within South Korea are global. The bank aims to improve pricing and liquidity for regional and global market participants and from within a specific location such as South Korea, is able to be free from any communist government inspired capital controls and network blocking, South Korea’s alignment with the West being the most strong in the entire region, but also benefit from venue proximity and commercial culture which emulates that of Japan.

South Korea is indeed a westernized version of Japan in terms of its corporate ethic. The country had several decades of American influence, hence its strong allegiance to western corporate society, yet has the modernity and sophistication of Japan, with its banks being close to vital executing venues and data centers in Tokyo, as well as having the trade relations that are notoriously difficult to attain in Japan for non-domestic participants.

BNY Mellon’s Seoul FX Trading Room provides liquidity both to domestic clients in Korea looking for exposure to major global currencies as well as to counterparties seeking to trade KRW across Asia-Pacific and around the globe. Clients transacting through the Trading Room are able to execute strategies using a variety of instruments, including spot, FX forwards and non-deliverable forwards.

“BNY Mellon is strengthening its capabilities in Korea to provide a more convenient and comprehensive KRW FX trading service to our domestic and international clients, while also helping them conduct their business more efficiently. This reflects our deep commitment to the Korean market and our confidence in the expansion of our FX trading business,” says Mark Militello, Head of Markets for BNY Mellon in Asia-Pacific.

“Korea is a strategically important market for BNY Mellon in Asia-Pacific. Our commitment to quality service and to Korea’s financial markets is a key element in establishing an even closer business relationship with our Korean clients,” says Ji Sang Don, Country Executive for BNY Mellon in Korea. “In addition, a number of unique service capabilities spanning the investment lifecycle offered by BNY Mellon will add diversity in the local market and enable us to be a stronger partner for our Asian counterparties as we help them fulfill their strategic goals.”

2018 is poised to be an exciting year for BNY Mellon’s FX business globally. In January, the company announced the launch of an FX Prime Brokerage service, adding a significant new source of liquidity for institutional FX clients.

Whilst BNY Mellon may not be among the very top institutions in terms of FX market share, the company has a very astute approach and is keen to invest in specific areas, one example being its participation in the FastMatch ECN venture which was founded in conjunction with FXCM and Credit Suisse.

Led by the astute and urbane Dmitry Galinov from the outset, FastMatch is well positioned as a prestigious ECN in New York, and with the buying in by BNY Mellon which joined existing shareholders Credit Suisse and FXCM in 2015, the longevity and elevation away from the retail shops was further cast in stone, and was an indication that an interbank dealer had an interest in ownership of companies in the non-bank OTC derivatives sector. FastMatch has since been sold to Euronext, and had been subject of M&A interest from some of Chicago’s prestigious derivatives exchanges previously.

Indeed, this new Seoul trading center may well commence with local currency, however it is clear that BNY Mellon’s aspirations are multi-pair as well as multi-regional.

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