Victory of the titans! “Regulators want small firms closed down” says senior FX industry executive

“In the end the regulators want a situation whereby there are a few large providers who are regulatory compliant with whom they have a good working relationship and all the small businesses, closed down …and that is what they will get!” – Simon Bird, Managing Partner, Onbjectivus Financial Consulting


Yesterday, the French financial markets regulatory authority, Autorité des marchés financiers (AMF) invoked its ban on the advertising and promotion of OTC derivatives in France, applying to all media channels including the internet, printed material, television and radio, as well as solicitation by telephone, covering all OTC derivatives including spot FX and binary options that are intended for a retail audience, with the exception of certain contracts for difference (CFDs) subject to specific criteria.

This is the latest in a series of actions by European governments to impose blanket restrictions on retail OTC derivatives providers wishing to market their services directly or indirectly to the public, a poignant example being Belgium’s outright ban of all OTC trading in its entirety.

In London, this presents an opportunity in that the vast majority of large, publicly listed companies that have been established in Britain cater to a predominantly British – and very loyal – client base, therefore provide proprietary platforms and offer CFDs as a core business activity.

Simon Bird

With France and Germany being two of the major secondary markets for the British firms (unlike overseas firms, British firms are UK centric with a high percentage minority of clients in mainland Europe rather than any Far Eastern presence) this bodes well for London’s giants.

Of course, regulatory direction is always less than transparent outside of North America, and it is very rare for regulatory officials to actually speak freely to the industry or to conductors of research on the rationale behind their moves, thus impartiality is hard to gauge, however in order to gain some impartial perspective, FinanceFeeds today spoke to Simon Bird, Managing Partner at Objectivus Financial Consulting.

Mr. Bird is a longstanding expert in the OTC derivatives business, especially within Britain’s CFD and spread betting sector, having spent five and a half years between 2008 and 2014 as COO of City Index.

Prior to his leadership position at City Index, Mr. Bird spent over twenty years in the interbank sector in London, comprising of 9 years at Bear Stearns as Senior Managing Director, responsible for leading the Portfolio Trading division, and was Head of European Electronic Trading including direct market access (DMA) and algorithmic trading.

Twelve years at NatWest Securities (now part of RBS, one of the world’s largest FX interbank dealers by market share) preceded, where Mr Birdw as Head of pan-European Equity Portfolio Trading.

Objectivus, Mr. Bird’s consultancy endeavor,  provides expertise in the areas of Compliance, Regulation and Risk Management to the electronic financial services industry.

Mr. Bird this morning told FinanceFeeds “I think the larger firms will welcome the change as they already have established businesses in those countries. Marketing is primarily focused on attracting new customers which is more to the detriment to the smaller, newer providers.”

“IG Group already offers limited loss by position guaranteed and that they do not offer high leverage which means they will continue without any immediate significant down turn. It will be the smaller, new businesses which will suffer.”

“In the end the regulators want a situation whereby there are a few large providers who are regulatory compliant with whom they have a good working relationship and all the small businesses, closed down …and that is what they will get!” – Simon Bird, Managing Partner, Onbjectivus Financial Consulting

This line of thinking is indeed absolutely correct, and has been echoed across the industry by many highly experienced senior officials with extensive institutional experience.

Dmitri Galinov

Recently, Francois Nembrini, Global Head of Sales & Liquidity Management at AFX Group’s QuanticAM, who previously spent twelve years as Managing Director of FXCMPro, which is FXCM’s institutional sector where he maintained long term and intricate relationships with tier 1 banks and hedge funds spoke out to this effect.

Meeting with FinanceFeeds, Mr. Nembrini said “It is quite apparent that the regulators, along with other institutions are setting in place the framework to have the entire non-bank OTC business revamped on exchange.”

Mr. Nembrini believes that the regulatory authorities in countries where the FX industry is populous, those being the United States, Britain, Australia and certain parts of the APAC region have an agenda in which they are setting in place a procedure in order to have the entire OTC FX and OTC derivatives migrated to an exchange model.

“This is apparent from many things, one of which is the advertising bans which have been imposed on non-bank retail FX firms in France, Belgium and soon Germany while you can easily advertise the same underlyings on exchange” he continued.

Another angle from which pressure is mounting is from within the large exchanges, which Mr. Nembrini believes are attempting to lobby the regulators as well as to gain influential controlling stakes in OTC businesses in order to attempt to push all retail trading onto exchanges.

“CME Group is looking at a project whereby they come up with a rolling spot contract which is a direct competitor to OTC derivatives firms” said Mr. Nembrini.

“This is not a consolidation in my view, it is an attempt to move the non-bank retail FX business globally to a different model. The exchanges have woken up to the fact that a large part of their retail businesses has moved off exchange and they want to get the business back. Scandals in the OTC industry, bankruptcies related to SNB type events and binary options scammers have given ample justifications to exchange lobbyists to argue against the OTC retail industry. In the end who do you think has more clout with the FCA? The LSE or IG markets ? It is obvious who is going to win. ” – Francois Nembrini, Global Head of Sales & Liquidity Management at AFX Group’s QuanticAM

Then there was the acquisition by Deutsche Boerse in July 2015 of FX trading platform 360T for $796 million.

Mr. Nembrini also quite correctly highlights a series of recent mergers and acquisitions which have involved large electronic marketplaces buying controlling interests in OTC electronic communication networks (ECNs).

“This direction is quite easy to see, especially when looking at some of the recent institutional level acquisitions that have taken place” said Mr. Nembrini.

“For example, Hotspot FX, one of the world’s most renowned OTC FX ECNs was bought by BATS Global Markets for $365 million in January 2015. It is also important to look at EUREX’s direction in which by September this year, the venue had extended its listed FX Futures and Options portfolio to include six new currency pairs while the overall minimum block trade sizes was reduced across all currency pairs to further improve hedging opportunities” explained Mr. Nembrini.

Francois Nembrini
Francois Nembrini

FinanceFeeds is also aware that this has been a focus for Deutsche Boerse for some time. Back in 2011, Deutsche Boerse took a minority stake in British FX technology solutions provider Digital Vega which was a technology vendor to buyside and sellside firms in the OTC derivatives sector.

At that time, the idea was to increase Deutsche Boerse’s positioning in the provision of pre-trade price transparency in the derivatives area for institutional investors and taking an initial footprint in the FX derivatives space. An investment agreement was signed last week, whereby Deutsche Börse will pay a US dollar amount in the single digit million range.

“EUREX  bought the 360T treasury system , with the intention of moving the entire FX structure from an OTC bilateral system into an exchange clearing structure in my view. Another example of equity exchanges moving into FX was NASDAQ which wanted to launch NASDAQ FX but were unable to do so as they failed to understand the nuances of liquidty provision in an OTC trading environment vs the exchange traded products dynamics. In any case there is a clear movement from exchanges into the OTC world. said Mr. Nembrini.

“ICE tried to buy FastMatch in July last year” he also pointed out.

Indeed that is correct, the Chicago-based electronic derivatives market place having prepared itself to buy FastMatch from its three shareholers, Credit Suisse, BNY Mellon and FXCM, for around $200m-$250m.

As the FX market continues to fragment, and higher regulatory costs for bilateral trades start to bite, exchanges are no doubt eyeing an opportunity to get closer to the FX market by offering capital efficient client clearing/counter-party risk mitigation solutions to the OTC markets.

It would therefore make sense for ICE as a vertically integrated exchange with a strong clearing capability, to look to enhance their position by buying a relatively small but growing FX platform like FastMatch.

It is clear from our research that listed derivatives exchanges are indeed moving toward attracting a larger group of retail clients and that platforms that serve the OTC markets are also looking in this direction.

Yesterday, FinanceFeeds spoke to Dmitri Galinov, CEO of FastMatch. He explained “Trade settlement is expensive these days. If I want to see how disproportionate this is, I compare the commission on the market to the cost of settling the trade. In the exchange listed futures sector, the settlement cost is around 1/1000th of the average electronic commission, whereas in FX it is often larger than the commission” he said.

“The exchanges will be the ones that solve this” said Mr. Galinov. “It is still much cheaper to clear exchange traded derivatives than clear on an OTC basis for the FX market so I really hope that the exchanges will step up and solve this issue.”

“A particular benefit of that would be cross margining capabilities. Exchanges can cross margin all asset clases and come up with an effective system that takes care of the cost as well as the counterparty risk” – Dmitri Galinov, CEO, FastMatch

It is absolutely a major issue that OTC counterparties face, in that the curtailing of credit from banks even for well capitalized firms has caused a ‘credit crunch. With exchanges as a centralized counterparty, Mr. Galinov concurs that massively capitalized venues are much more favorable to banks and liquidity providers than having to face every party separately.

“As an example” said Mr. Galinov, “CLS does not guarantee settlement. The fact that two people traded via CLS doesnt mean two people will get their money. If you survey institutional participants and ask them whether OTC clearers guarantee the trade, they may well say that it does and this would be a misunderstanding. Exchange clearing would lower the cost and lower the risk, as you would have to settle with one well capitalized central party” he concluded.

The astuteness and understanding of this level of detail by some of the world’s regulatory authorities is much less granular and much more limited than the full extent of knowledge displayed by industry professionals whose acumen and career standing is as high as these executives, thus the regulatory methodology is much more generic, meaning that instead of garnering this much knowledge and working with the industry, which is time consuming and expensive in a world in which the development cycle would out accelerate any regulatory progress, they use a pick axe to crack a peanut.

On this basis, Mr. Bird is very likely correct in his analysis.

Image: Royal Exchange Buildings, London. Copyright FinanceFeeds

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