The computer says no. Tier 1 banks making it very hard for FX brokerages to get accounts

It is becoming increasingly difficult for new FX brokerages, and FX service providers wishing to diversify into the brokerage sector to be able to establish bank accounts with mainstream financial institutions.

Whilst this is not necessarily a new dynamic, a recent investigation by FinanceFeeds has uncovered that banks in regions that are very populous with FX industry participants are becoming very strict with regard to the risk management aspect of allowing any entity associated with the FX industry to open bank accounts.

This ranges from brokerages, to signal providers, technology vendors and developers of ancillary services, once the words ‘retail FX’ come about, the banks retract.

Bank of Cyprus is a case in point.

So stringent is the compliance and risk management procedure within the Bank of Cyprus these days that many entities looking to establish a bank account for the purposes of operating an FX firm or a service provider to FX firms could possibly be rejected, even if well capitalized.

Last week, research by FinanceFeeds showed that when attempting to open a new corporate banking account with the Bank of Cyprus’ International Business Unit (IBU), it was stated that it is entirely possible to open a client money holding account or a business account for maintaining operational capital for any other type of client-facing business, or e-commerce entity, but when FX was mentioned, the offer of both a client assets holding account and a business account within which to store operational capital was withdrawn by the bank.

This is particularly interesting bearing in mind that Cyprus has a very highly developed retail FX industry, and the island’s banks do not act as interbank FX dealers, instead their core business being providing accounts to firms based in Cyprus which are often owned by overseas entities, with a mainstay of the national economy being the FX industry.

Despite this, the bank identifies extending business accounts to new FX firms as a high risk activity.

Looking toward the largest financial center in the world, from which six Tier 1 banks handle 49% of all global interbank FX order flow, London was the next port of call.

HSBC and Barclays demonstrated an interesting dichotomy: FX trading is for banks only!

When explaining to HSBC’s business banking representative via the telephone banking service, the representative did not know what FX trading was, despite the vast majority of the world’s liquidity providers, FX brokerages and supporting businesses being based in London.

After a substantial period of time on hold, having explained in granular detail what FX trading is, to a representative of the business banking division of HSBC, the company which overtook Citi to take the number 1 slot as the largest global interbank FX dealer in 2015 with 5.4% of all global FX client volume executed electronically via its single dealer platform, the reply came back “Retail FX firms are not entities that we deal with unfortunately.”

Answers from Barclays, whose BARX interbank FX platform is third in the world in terms of interbank FX market share, echoed those of HSBC. According to a representative at Barclays business division today, FX brokerages are outside the company’s remit.

Selecting a specialist business orientated bank with an ethos that serves clients via recommendation is also anathema to the FX industry, it seems.

A meeting with Handelsbanken, which does not have High Street branches, yet operates across the United Kingdom, via referal from existing customers only, deduced that the same outcome would be proffered should a corporate customer approach the bank for a client account or operational capital account if that client was a retail FX firm.

“Unfortunately we are am unable to open an account for a company in this business. Whilst the paperwork all looks in order, these regions are high risk in relation to our risk assessment on money laundering. Handelsbanken’s business model is to operate in local markets with customers operating in those local markets” came Handelsbanken’s response.

“In effect I can’t build a case to support the bank dealing with Directors based outside my local market in a country with a high risk rating” continued the Handelsbanken representative.

“This does not help your requirement to open a bank account in the UK and I suspect that you will find that you get the same response from most UK banks” he concluded.

He is indeed correct – although this extends far beyond the UK.

Citigroup, the world’s largest FX dealer by a considerable margin which conducts 16.1% of all global order flow from its Canary Wharf headquarters has been the number 1 FX dealer from 1976 until 2015 when HSBC overtook it with its corporate client base representing the largest in the business, recently stated that according to its internal risk management assessment, extending credit to OTC brokerages has a 56% potential default risk, thus the counterparty credit aspect is now a major point of interest in which brokerages are finding it harder to get credit for the purposes of FX trading via prime brokerages.

On this basis, better prime brokerage relationships are being formed and technology firms are forging an ‘ecosystem model’ to facilitate best execution despite the difficulties associated with counterparty credit risk, however Citigroup also has expressed its dissent for FX firms wishing to open operating capital accounts with the firm, the answer being a firm no.

For this reason, many established firms are able to work with banks in regions with a very highly regarded financial markets environment, as they have maintained their relationships with banks for several years and have large capital bases.

All of London’s existing spread betting and electronic trading firms have very large capital bases and long standing relationships with banks in the Capital, however being a new entrant to the market, no matter how much capital is able to be registered, the banks will absolutely not take the business.

Even having an FCA license and proving that a broker has excess capital to cover positions is not of any consequence.

For this reason, many firms have looked wider afield, however clearly the established firms with proven track records among large banks are at an advantage, whereas those wishing to either start a brokerage or expand their business into other territories are likely to either be given the cold shoulder, or have to eschew offering clients top-drawer banking facilities when depositing or withdrawing funds.

Indeed, the establishment is, well, the establishment and the newcomers will have to look elsewhere, meaning outside of the Tier 1 structure.