World’s fifth largest FX dealer brings in tech giants

Prime brokerage goes high tech, although this time toward the lithe and dynamic external fintechs.

london

Large Tier 1 banks have often made a clear point that their technological topography will always be produced and supported in house, often by large head office-based IT teams numbering several hundred per company.

Ever since the 1990s, bank trading infrastructure has been the creation of, and has been operated by internal departments, occasionally with long term outsourcing of solutions architecture projects to on-site consultants from Fujitsu-Siemens, Steria, VMWare or Accenture.

These days, many banks are lumbered with legacy systems, largely due to the necessity from an operational specification and security perspective, to operate completely custom systems with long term staff being responsible for them, however the development cycle of technology in electronic trading has presented a delivery issue which is difficult to overcome when investment in technology needs to serve its intended lifetime.

HSBC, the world’s fifth largest FX dealer by market share, has this week begun to take steps outside its own Canary Wharf glass walls, and has quietly enlisted a series of external FinTech companies to work within its fold, both to expand its FX capabilities and to let it focus on “superstar” technology in-house.

The bank has begun building up a portfolio of financial technology firms to work within its operations, which the bank believes will help strengthen its FX capabilities and products. FX being a core business activity for the bank.

The company is collaborating with a variety of companies focused on areas such as settlement, balance sheet optimisation, credit, risk analytics and even robotics, in order to improve its services, believing that there are many specialist companies in the financial technology area that are outside of the banking arena, yet have the aptitude and rapid development skills to create a dynamic means of bringing very high quality new services to fruition, and wishes to assemble them into HSBC as an ecosystem.

This is a very avantgarde direction from a mainstream bank, as the usual remit is to take note of a valuable new technological development and then brief the internal teams on how to design their own version of it and integrate it.

When I worked for 20 years on bank trading infrastructure, the development time for additional services and migrations of upgrades to existing infrastructure was 2 years, and was done in house.

Today, 2 years is a lifetime. Bank IT divisions can now easily work closely with FinTech firms and assemble them as a corporate ecosystem governed by the main IT division of a bank, especially given the London centric nature of most FinTech companies.

A precursor to this direction was made clear by HSBC just two months ago, when it went live on the Capitolis Novation service in FX.

HSBC, along with FX market share rival Citigroup, have both been losing FX market share to non bank market makers which are specific to the FX industry, in particular XTX Markets which is now the world’s number 1 FX dealer.

At the time, Vincent Bonamy, global head of global intermediary services at HSBC, said: “The FX prime brokerage novation tool will provide access to liquidity and credit in the FX options market, while allowing clients to offset their positions across their network of banks.”

Gil Mandelzis, CEO of Capitolis, adds: “Citi and HSBC have used this service extensively across all their client activity, with executing banks and counterparties and for their proactive commitment to growing the community of participants across the buy and sell-side.”

Mr Mandelzis has a very long history of FX innovation at corporate level, having been one of the founders of Israel’s Traiana which was acquired in 2007 by Michael Spencer’s interdealer broker ICAP, when Mr Mandelzis was appointed CEO of EBS BrokerTec, a $500 million technology firm that was created through the merger of two fixed income and FX trading businesses, before founding Capitolis in 2017.

Clearly, the banks have to do something to maintain their Tier 1 status and secure methodology as top level FX dealers, but also have to ensure that their high quality execution and competitive nature is preserved to avoid facing further onslaught from lean and progressive non-bank market makers.

HSBC’s step appears to be a very good compromise.

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