The A and B book in China: A good look at prime brokerage and risk management – An interview in Hong Kong

A partnership of great interest to many institutional firms and the retail brokerages that are potential and existing customers, takes the form of IS Risk Analytics, the risk management unit of British prime of prime brokerage IS Prime, having acquired the assets of renowned North American risk management service providers for brokers, Think Liquidity.

ISPrime is indeed an entity that is interesting in its own right, having been founded at the end of 2014 run by senior institutional FX industry executives Raj Sitlani and Jonathan Brewer as a subsidiary of Lord Stanley Fink’s ISAM hedge fund which dates back to 2008.

The acquisition of ThinkLiquidity’s assets and subsequent formation of IS Risk Analytics places ThinkLiquidity firmly in the ISPrime fold, with Jeff Wilkins, former Managing Director of ThinkLiquidity as Managing Director of IS Risk Analytics.

The question that this poses centers around whether retail brokerages need a dealing desk anymore, as there is now a holistic solution.

Whilst in Hong Kong recently, FinanceFeeds spoke today to Jonathan Brewer, Managing Partner at ISPrime, and Jeff Wilkins, Managing Director of IS Risk Analytics, in order to look at how the firm will serve retail brokerages in China and globally.

Have you seen a change in client requirements as brokerages become more interested in managing their own client bases in China and firms that would have traditionally been IBs are now looking for direct access to live market pricing? How is this impacting your business/the potential opportunities for IS Prime, IS Prime Hong Kong and IS Risk Analytics?

Jonathan Brewer: Broker clients and IBs in China are becoming more advanced and discerning. Whilst they still typically focus on best commission rates and tightest spreads, they have started to appreciate that working with a regulated PoP that can offer bespoke solutions and added value services is a better, more robust strategy.

Accordingly, we believe that the opportunity in the region remains immense. Not only can we offer our market leading liquidity and technology solutions but with ISRA we can assist with risk advisory services and A/B book decision making policies.

Historically, the market in China has been heavily driven by B book brokers but as the client base becomes more sophisticated, there is an increasing demand for our services. Our comprehensive group product offering is what this exciting and maturing market place needs more and more.

During the iFX EXPO Asia 2017 in February this year, what factors were most important to liquidity takers from Hong Kong and mainland China when assessing a liquidity provider?

Jonathan Brewer: As expected, spreads, execution and commissions are all important factors in the decision-making process, but what is becoming even more important is the stability and financial backing of the PoP. There have been many brokers throughout China who have had suffered financial losses by dealing with unreliable counterparties.

There is a once bitten, twice shy attitude throughout the region – and rightfully so. This is a major differentiator for our group because with our pedigree and backing, we are on a different tier than the majority of other PoP’s in the region.

Chinese IBs and brokerages have often far greater assets under management than firms outside of China, and in many cases, manage them for their clients, who are investors rather than traders. Bearing this in mind, what risk management controls do Chinese companies look for when selecting a liquidity integration solution and what type of aggregated feeds do they want from their prime brokerages?

Jonathan Brewer: We do not believe that the risk controls or aggregated feeds are necessarily materially different for asset managers or brokers. What is important is that pre-trade risk controls are in place (which in this day and age, we deem to be mandatory and an integral part of our offering) and that extensive pre-go live liquidity conversations take place.

This means that both client and PoP respectively understand the potential liquidity solutions/aggregated feed offerings and nature of the flow. If these conversations are transparent and open, then both sides will be well placed to build a very strong long-term partnership.

Do you think that within a very short time, the entire ecosystem from liquidity provision to prime brokerage right down to the retail client front end will be hosted in China, and connected to global liquidity via Chinese branches of Western PBs with their entire infrastructure hosted and situated in China? If so, will this create a massive surge forward in Chinese business as it will be within the government’s remit of being supervised from the inside? How can the risk strategy be managed by Chinese divisions of overseas PBs?

Jonathan Brewer: We do not think this will happen in a very short time. The market is not that mature yet.

A specialist risk analytics division of a major prime brokerage gives a distinctive advantage to Chinese portfolio managers. Will ISRA now look to form strategic partnerships with portfolio managers in China’s important Tier 2 development towns?

Jeff Wilkins: IS Risk Analytics will always be open to the idea of forming strategic partnerships with clients who have a genuine need for our suite of products and a desire to avail themselves of our risk advisory services.

The idea is to work collaboratively with clients. We are still relative newcomers to the region and, as such, our knowledge and understanding of Tier 2 development towns is quite basic. However, rest assured that if there are interesting opportunities out there, we will secure them.

Word has it that your team is the risk desk behind some of the largest brokers in China and Hong Kong. Can you speak from a risk management perspective on how the retail client base in China behaves compared to other areas of the world?

Jeff Wilkins: Different geographies can have very unique flow characteristics, and China is no exception. What we have found throughout China that there is a very polarizing set of traders and the sharper flow is very good at disguising itself within a book of business.

There are certain regions throughout China where the high frequency, arbitrage style flow is originating. This is extremely dangerous for a broker with a limited or inexperienced risk management team.

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