Heightened competition in FX markets

Foreign exchange (FX) markets have become more competitive in the past year, as global trade has increased and the currency markets have seen a considerable amount of volatility.

The top five foreign-exchange dealers have lost market share over the last 12 months while regional dealers have become more prevalent, according to a report from US management consultancy Greenwich Associates. The top dealers still capture 44% of global market share in aggregate, but this figure has fallen from 48% a year ago and 53% in 2013.

The top four dealers are JP Morgan, Citi, UBS and Deutsche Bank. The fifth spot is shared between Bank of America Merrill Lynch, Barclays, HSBC and Goldman Sachs.

“The FX market is now one of the least concentrated over-the-counter (OTC) markets in the world, and financial end-users, regulators and emerging dealers all benefit from its growing diversity,” said Kevin McPartland, head of market structure and technology research at Greenwich Associates.

McPartland, who authored the firm’s report on the topic, said there were several trends driving these changes. Top-tier dealers have been narrowing their product ranges, regional and client coverage, to focus on where they see the highest profit potential.

Meanwhile FX investors are increasing their trading through multi-dealer platforms which create a more level playing field for liquidity providers. Regional dealers have been stepping up their game while a new cadre of principal trading firms are threatening to enter the fray.

“The bottom line is that the FX market is increasingly competitive, and competition is always good for the market,” said McPartland.

A higher priority

This may be good news for corporate treasuries, as managing policies to maintain the value of foreign denominated cash flows has become increasingly high on the agenda over the past 12 months of political and economic instability. Some vendors have reported an increased demand for products that can assist corporates with the FX hedging strategies.

Michael Gowland, global head of treasury at cross-border payments firm EarthportFX, said: “We have seen an increase in customer use of products such as market orders and stop loss orders to protect against dramatic market movements. These orders also operate 24/7, ensuring companies are not penalised for market movements outside normal working hours.”

Maintaining visibility over such a tumultuous period is challenging for any corporate treasury. A recent study by Protiviti, a subsidiary of recruitment firm Robert Half, identified that cash forecasting was one of the highest-ranked priorities in its study of chief financial officers’ (CFOs) top issues.

“Treasurers are certainly more open and eager to hear about changes in market dynamics and how they might consider adapting their strategies to accommodate these changes,” said Gowland. “It’s no longer a question of price but also having the right strategy – balancing spot with forward transactions and having the right balance of open versus fixed forwards, staggering maturity dates where applicable,” he added.

Within Europe, Brexit is undoubtedly cause for much concern, bringing about dramatic swings in the value of the pound. This volatility is to such an extent that earlier this year, Noel Quinn, HSBC’s head of global commercial banking, reported some clients requesting some foreign exchange to be routed through the bank’s Paris office instead of London.

This instability will last for the next few years predicts Markus Ohlig, leader of Greenwich Associates’ investment management practices in Europe and Asia, excluding Japan.

“Large FX movements within a short time span can significantly impact margins when a company’s costs and revenues are denominated in different currencies – such as car manufacturers building cars in Germany and exporting them to the UK,” said Ohlig.

“Companies must have a thorough understanding of residual currency exposure that result from such operational mismatches.

“In the short-term, companies may turn to their banks for financial hedging solutions to help manage this exposure. But in the long-term, only operational hedges will provide a sustainable solution – which means moving costs or revenues from one currency to another,” he added.

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