RBS makes almost a billion in profit but will NEVER move its FX business to Amsterdam despite the noise

Once again, left-leaning media in the UK has blindly reported that RBS, whose market share in FX has dwindled since 2015 when it was the tenth largest interbank FX dealer in the world, is looking toward moving to Amsterdam once Britain formally exits from the European Union.

Yes, and the sky is about to turn green.

This week, RBS, whose operations at 250 Bishopsgate in London nestle in the very heart of the institutional FX epicenter that powers the entire world, released its revenue metrics, with a very healthy £939 million in profit having been declared for the first half of 2017.

This is a very poignant change in fortunes as the company made a multi million pound loss in 2016, a dynamic that was common with many banks across Britain’s Tier 1 financial sector.

Indeed, the restriction of counterparty credit to the non-bank electronic trading sector was likely a contributor to lack of revenues for banks, as the prime brokerage businesses of most Tier 1 banks are massive generators of revenue on a very efficient operational model because they only require one office, and power a gigantic industry that turns over $5 trillion per day in notional volume.

RBS may well be back in the black, but there is absolutely no way that the company will waste any of its profits moving its operations to Amsterdam, a city with absolutely zero Tier 1 financial markets presence.

ABN AMRO and Rabobank may well be Dutch, but their interbank electronic trading is done from Bank Street, E14 – the very heart of Canary Wharf.

In the FX industry, London is the absolute powerhouse for the entire region, and indeed one of the world’s focal points for the entire financial services business. It is a gigantic producer of revenues and has a highly dedicated and skilled series of professionals who continue to strive toward moving forward, and do so in a very sophisticated manner.

Underpinning the entire combined cognitive prowess of London’s senior executives is a massive and finely honed technological infrastructure that ranges from hosting (Equinix LD4 being one of the largest electronic trading data center locations in the world) to order routing systems, liquidity management and in-house developed interbank and institutional trading systems that are supported by hundreds of developers and engineers per bank.

Last week, FinanceFeeds met with senior executives at RBS’ investment banking division, NatWest Markets.

During the meeting, it became very clear that NatWest Markets, and RBS as a wider entity, is becoming very friendly toward the OTC electronic trading industry once again, and is, subject to a very stringent corporate due diligence procedure, very willing to extend counterparty credit on a prime brokerage basis to institutional OTC firms in London, which in turn would distribute aggregated Tier 1 liquidity to retail firms on a prime of prime basis.

This is very encouraging, and indeed FinanceFeeds can verify that a number of new prime brokerage relationships have been cemented over the past few months here in London between Prime of Primes and RBS/Natwest Markets, operated from RBS’ Bishopsgate headquarters.

If the recent activities by City of London peer Barclays can be used as a yardstick, it can be considered very clear that economies of scale are vital for large financial institutions, however Barclays is conducting its dominance by focusing on FX and other interbank derivatives asset classes rather than its traditional business, as last month the British company completed its complete exit from the European market’s traditional banking sector, culminating in the sale of the final remaining 74 branches in France to private equity firm AnaCap Financial Partners, meaning that it now can concentrate its efforts solely on being at the very forefront of London’s global electronic trading epicenter.

So, that signaled the end of Barclays’ operation of branch banking across European high streets, a direction that concluded the Bank’s offloading of its entire Barclaycard credit card operations in Spain and Portugal to Bancopopular-e, a total divestment of its stake in Barclays Africa, a complete dispensement of its Egyptian operations and the sale of its wealth and investment management business in Singapore and Hong Kong.

Meanwhile, on home territory, Barclays continues to stand out in terms of procedure and its domination of market practice with regard to electronic trading with its BARX single-dealer platform.

Barclays is one of the world’s most prominent proponents of the last look execution procedure, its BARX platform which provides FX liquidity by streaming indicative prices on an in house and third party platform basis.

The same applies to RBS, which may well host some European call centers on the mainland for its traditional retail banking business, a division which has done nothing but cost a fortune in regulatory fines and be unprofitable in terms of real estate and staff costs vs the small mom and pop business that is done at branch level.

Indeed, if it can be deduced from FinanceFeeds meeting with RBS last week in the Square Mile that the company is absolutely willing to do business with OTC prime of prime brokerages, then it would certainly follow that last week’s round table in Broadgate which FinanceFeeds attended and was hosted by a major interbank FX dealer that handles over 12% of the world’s FX order flow included proponents of the OTC sector (including me – Ed). This demonstrates further that the banks are holding their hand out once again. Of course, criteria will still remain strict, but the OTC business is something they want.

The largest British banks in terms of interbank FX order flow are Barclays (via the BARX platform), with 8.11% of the global market share, HSBC with 5.4%, RBS with 3.38% and Standard Chartered with 2.4%. OK, Standard Chartered is South African, but it is a completely British venture from historic times until now. If global banks are considered, Citigroup and Deutsche Bank are the largest, however they conduct their business also from London.

The British contingent are the very same banks that exposed themselves to vast unrepayable loans to retail customers, including credit cards, unsecured borrowing and perhaps even more remarkably, allowing retail customers to make their own declarations about their earnings and existing assets, which often were wildly exaggerated, meaning that mortgages were granted to those who could not afford to meet the commitments, ultimately contributing to the collapse and government acquisition of many major British banks.

Some 9 years have passed since the dark days of the bank runs and the credit crunch, however an investigation by FinanceFeeds demonstrates that the banks are shunning well capitalized FX brokerages and restricting prime of prime relationships even to firms with massive capital bases and highly complex risk management policies in place, yet the very same banks are making a return to offering 95% loan-to-value mortgages to retail consumers with no savings and no real proof of income or collateral to guarantee the repayment.

Added to this, the banks are not even profiting from this very much, as the interest rates are so low that they are almost negligible.

In the FX brokerage business, one of the most difficult professions is to head a division of a liquidity provider or prime brokerage in a capacity which requires forging and maintaining relationships with banks. The butting of heads over where to dispatch order flow plus the continual metaphorical grilling that the bank desks give prime brokerages with regard to which flow was offset against what, with a watchful eye on risk all the time.

Companies in London with capital bases of over $500 million and market capitalization figures running into the billions are the bete noire of banks, yet anybody can walk into a retail high street branch of the same bank and walk out with a mortgage secured on a house whose value may go down, not just up, having self-declared a fictitious income and having committed very little personal capital toward the transaction.

Local branches of HSBC and Barclays have set up stands in the front of their entrance halls, with a friendly and polite sales person proactively approaching retail customers who enter the branches to conduct counter transactions to see if they can sell them a mortgage with only 5% downpayment and no ‘bureaucracy.’

However, if you are the head of PB relationships at a large brokerage, you are likely to be butting heads with the risk management teams of the very same banks to get orders processed.

When viewed like this, it makes no sense to consider the FX industry as a high risk, when the retail banking businesses of most of the Tier 1 banks are far higher in terms of risk, whether from an exposure or operational perspective.

With MiFID II imminent, and allowing ‘systematic internalizers’ (b-book) brokerages to have their own remit to report exactly as that, banks have to realize that by pushing the majority of small to medium-sized brokerages onto b-book modus operandi, they are actually risking a massive revenue stream, and a revenue stream aided by companies that actually lead this industry in terms of trading infrastructure, knowledge and sophisticated liquidity management systems and order flow management, rather than concentrate on their archaic and unprofitable retail banking arms which cost a fortune in real estate, staff, and endless fines.

London, it is then chaps, and business as usual.

Image: RBS head office at 250 Bishopsgate EC2. Copyright FinanceFeeds