Tier 1 bank FX credit restriction U-turn to benefit OTC sector: RBS downsizes to focus on operations at 250 Bishopsgate.

It has been clear for some time now that despite the Tier 1 bank FX risk management departments’ lack of appetite for extending counterparty credit to OTC derivatives companies, culminating in just a handful of genuine prime of prime brokerages being in existence today, largely those which have been under continual scrutiny during their long term relationships with the banks with whom they trade, and can continually maintain a balance sheet in excess of $100 million.

Today’s single dealer platforms are, however, a golden egg for London’s banks, largely because they realize that this is a huge and very effective business for them. They operate one center, and participate in a vast and liquid market, rather than have to maintain thousands of retail branches and serve small retail customers with massive personnel costs and regulatory fines emanating from the misselling of non-entity products such as payment protection insurance.

Thus, despite the overall reluctance by risk managers and the obvious interest from corporate sales divisions in working with OTC firms as providing liquidity to Prime of Prime brokerages which then distribute it to a vast retail FX market, there has been a polarizing of opinions among many banks.

Last summer, FinanceFeeds spoke to NatWest Markets, which showed a very distinct interest in fostering prime of prime relationships with non-bank entities, as long as the relevant (and extensive!) due diligence is completed.

FinanceFeeds followed this up with some London-based prime of prime brokerages, and it appears that most certainly, RBS has the lowest entry barriers and is actually willing to do business as a Tier 1 counterparty. The bank realizes that London’s prime of prime sector is very well organized and is operated by large, well-backed corporations and in some cases hedge funds, and that the rules are followed diligently, hence its willingness to open its doors once again.

In October, NatWest Markets’ parent company, RBS, the world’s seventh largest inetrbank FX dealer by market share, raised the NatWest flag at RBS’ 250 Bishopsgate head office, marking an era of markets-related activity going forward, and today, the bank has taken another step in demonstrating the importance of keeping markets-related business at the very top of its agenda, this time demonstrated by its downsizing of office space.

The bank has today confirmed that its 280 Bishopsgate head office will be sold, and the downsizing of operations that ensues will result in a relocation of staff from 280 Bishopsgate to 250 Bishopsgate, which is home to the firm’s investment banking and electronic trading businesses.

This move shows that the importance remains concentrated on electronic trading, alongside the firm’s decision last month in which it said it would close 259 Bank of Scotland and Natwest branches and lop 680 jobs, once again demonstrating that providing global market access from one office is a far more profitable and efficient enterprise than maintaining traditional banking operations via a branch network.

Last year, generic non-FX industry speculation among the banking sector heralded a pro-European falsehood that RBS would move its FX business to Amsterdam, a notion that FinanceFeeds at the time consdiered to be preposterous.

RBS made a massive turnaround in fortunes, demonstrating £939 million in profits for the first half of 2017, however there is no way RBS will be moving to Amsterdam, not by a long shot as its FX and prime brokerage business is far too valuable and must remain in London, a dynamic further demonstrated by the firm’s choice to sell 280 Bishopsgate and downsize its staff whilst retaining 250 Bishopsgate.

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.

During a further meeting between FinanceFeeds and senior executives at RBS’ investment banking division NatWest Markets at 250 Bishopsgate, 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.

The somewhat annodyne corporate statement by RBS today does not allude to this, however it is clear from the firm’s method of structuring the downsizing and how it has concentrated on moving away from branch banking and courted the electronic trading world that renders the statement generic.

“As we become a simpler, smaller UK-focused bank and as we encourage more flexible ways of working, we no longer require the same amount of office space as we once did,” the RBS spokesperson said.

“We will be exiting 280 Bishopsgate by the end of 2019 which will further reduce our property costs in London. We will be revamping our nearby office at 250 Bishopsgate later in the year to accommodate more staff and to create a better, more flexible working environment” he continued.

With regard to the need for banks to focus on the FX industry, FinanceFeeds spoke recently to Nicc Lewis, CMO at Leverate, who explained “The issues European banks are suffering is just the tip of the iceberg of many problems surfacing in Europe and globally.”

“We are all getting smarter with 24/7 access to information and the ability to make better educated decisions. This also promotes volatility as the effect magnifies trends and people jump on the bandwagon as a result of their research. The effect also diversifies suppliers as consumers or customers are willing to move away from traditional suppliers in search of better value for money” – Nicc Lewis, CMO, Leverate.

Mr. Lewis then explained the specific aspects of the FX industry in Europe with regard to the effect this will have. “I believe the Forex industry in Europe will be affected in three ways” he said.

With regard to liquidity provision, Mr. Lewis concluded “Brokers are already looking to diversify their pool of liquidity providers to minimize their exposure and risk; this is a knock-on effect following SNB. It will be interesting to see how willing brokers are to diversify their risk from premium liquidity providers outside Europe. The technology is in place to allow for execution from Asia.

“Brokers should check that execution speed is no higher than 200 ms, and more like 100 ms.”“First, Banks and traditional financial companies will look into diversifying into the retail sector as an extension of the business in order to generate volume and mitigate their decline. Secondly, consumers are becoming more aware than ever of regulation and looking for the trust it brings. This will lead to opportunities for Brokers to build a reputation and business on trust” he said.

FinanceFeeds concurs with this, and whilst banks are maintaining a politically correct stance and not overtly stating their interests, it is clear by the corporate direction that many are taking, RBS being no exception.