Hedge Funds Sound Alarm on FX Prime Brokerage Market Changes

<p>Consolidation
in the forex prime brokerage (FX PB) sector is becoming increasingly apparent,
especially to hedge funds. A new report by Acuiti, commissioned by Standard
Chartered, underscores the growing concerns among fund managers about the
adverse changes occurring in the sector. The study, based on interviews with 57
hedge fund operations executives, shows that nearly 40% have reduced their FX
PB partnerships in the past three years, often because providers are exiting
the market.</p><p>Declining Number of FX
Prime Brokerage Relationships</p><p>The report
revealed that hedge funds are increasingly worried about the thinning landscape
of <a href="https://www.financemagnates.com/tag/prime-brokerage/" target="_blank" rel="follow">FX PB providers</a>. The most common reason for reducing these relationships was
an internal consolidation decision. However, one-third of the firms that
reduced their FX PB providers did so because their existing broker withdrew
from the market, while 24% were forcibly offboarded.</p><p>Firms that
were either offboarded or whose provider left the market reported multiple
challenges. These included reduced access to liquidity, the costs associated
with onboarding a new broker, and heightened operational and <a href="https://www.financemagnates.com/terms/s/settlement/">settlement</a> risks.
Notably, more than a third of these firms lacked a contingency plan, further
intensifying their concerns.</p><p>“Hedge
funds are highly reliant on their FX PB providers and it is no surprise that
levels of concern are high across the market,” Ross Lancaster, the Head of
Research at Acuiti, commented.</p><p>Also, the
industry's risk profile has undergone scrutiny following several high-profile
losses, including the Archegos Capital Management collapse. These incidents
have led to increased minimum monthly commissions and the offboarding of
smaller firms that offer lower transaction volumes, creating a two-tier market.</p><p>“There is
an opportunity for expansion among the sell-side to meet the demand from hedge
funds both to access unique trading opportunities in emerging and frontier
markets but also to reduce operational risk associated with the dependence on
specific providers,” Lancaster added.</p><p>Satisfaction Levels Vary
by Firm Size</p><p>In addition,
the study found that smaller hedge funds, particularly those with Assets Under
Management (AUM) of less than $1 billion, risk facing limited provider options.</p><p>Hedge
funds' contentment with the number of available FX PB providers differed
substantially based on the size of their AUM. Around 43% of firms with an AUM of
less than $1 billion expressed dissatisfaction, compared to only 12% and 8%
among firms with an AUM of over $5 billion. Consequently, smaller hedge funds
are increasingly dissatisfied with their limited options.</p><p>In 2023, there has indeed been little talk about new FX PBs entering the market. Instead, the focus has been <a href="https://www.financemagnates.com/institutional-forex/marex-diversifies-portfolio-with-cowen-prime-brokerage-acquisition/" target="_blank" rel="follow">on existing firms being acquired</a>. For example, in September, Marex announced the acquisition of Cowen's prime brokerage business. However, the cryptocurrency market <a href="https://www.financemagnates.com/institutional-forex/institutional-crypto-needs-greater-trust-prime-brokers-can-help/" target="_blank" rel="follow">offers an opportunity for industry growth</a>, where investors are continually seeking greater trust.</p><p>Impact and Future Outlook</p><p>Over half
of the surveyed firms were quite concerned about the possibility of their FX PB
providers exiting the market, while 16% were very concerned. Andy Ross, the Global
Head of Prime &amp; Financing at Standard Chartered, noted that hedge funds are
facing increasing challenges in finding a reliable FX PB provider, particularly
as they seek to expand their currency trading strategies.</p><p>Therefore,
as the market continues to evolve, hedge funds must be increasingly strategic
in choosing their FX PB providers, especially in a consolidating market that
poses both operational and <a href="https://www.financemagnates.com/terms/l/liquidity/">liquidity</a> risks.</p><p>“At the
same time, with ongoing growth in the global market place, hedge funds from
across the world are looking for a partner that can provide access to a broad
spectrum of currencies to optimise their trading strategies,” Ross concluded.</p><p>This
research report draws upon a survey involving 57 hedge funds, with participants
hailing from various regions, including North America (19%), the European Union
(24%), the UK (29%), Asia (22%), and other parts of the world (6%). The AUM for
these funds ranged from $0-100 million (11%), $101-500 million (16%), $501
million-1 billion (14%), $1-5 billion (23%), to over $5 billion (37%).</p>

This article was written by Damian Chmiel at www.financemagnates.com.