A combination of higher capital requirements, higher costs and reduced profitability has meant that banks are no longer offering the credit facilities institutions need to trade FX.
Abu Dhabi-based online Forex and CFD broker ADS Securities LLC has just announced the launch of its prime of prime (PoP) product for FX providers that either don’t have an existing prime broker (PB) or need additional credit lines along with access to either their own Liquidity sources or from ADS’s liquidity.
ADS created its new PoP product offering after it saw an opportunity to utilize its strong relationships with existing PBs along with its high level of capitalization, in order to offer firms credit lines to support their PB needs.
The company has a long-standing principal trade offering through its ADS Prime offering, yet that required firms to uses the company's own sourced liquidity, whereas the new PoP offering allows firms to use ADS to settle their trades (as their PB) even when the liquidity provider (LP) is not ADS (which sources its liquidity from nearly 80 providers).
This allows a firm that is already talking to another LP to come to ADS and ask for it to be their PB on the trades with that LP, and at a cost of an extra $1 per million, versus free when using ADS liquidity which has its fee embedded in the spread already, as explained by people familiar with the product.
A company representative explained to Finance Magnates that the execution on ADS’ Liquidity is free of charge which helps clients with the average PB fee paid each month, and included the following example where the average PB fee per million is calculated using the following formula:
Average Prime Brokerage fee per million = (sum of x + y) / (total monthly volume in millions), when based on 50% of Execution (a) on the Month vs ECN charged at $x, and 25% of Execution (b) on the Month vs Direct Bank charged at $y, and 25% of Execution (d) on the Month vs ADS Liquidity is charged at $0 per million.
James Watson
Source: LinkedIn
Commenting in the company’s official announcement, Marco Baggioli, Chief Operating Officer (COO) of ADS Securities London Limited, said: “The reduction of credit and risk appetites and the subsequent decline in banks offering FX-specific prime brokerage services has led to clear market demand for a true Prime-of-Prime product, a service that provides customers with as close to a direct prime brokerage relationship as possible. This is precisely the gap in the market ADS Securities will fill.”
The announcement included ADS referencing the challenges that have emerged in the PB industry for forex dealers after the Swiss National Bank event in January of 2015 which has since caused a credit squeeze and higher capital requirements for brokerages to access PB services.
ADS explained that many of the Tier 1 banks stopped providing FX-only PB services, as the higher costs and capital requirements had caused reduce profitability. The news follows just days after the company released a commercial featuring Oscar-winning actor Adrien Brody.
James Watson, Managing Director of ADS Securities London Limited, added: “A combination of higher capital requirements, higher costs and reduced profitability has meant that banks are no longer offering the credit facilities institutions need to trade FX."
Mr. Watson further explained: "ADS Securities Prime-of-Prime offering has been developed to help these firms—even those that have Prime Brokers but still do not have the trading lines they are looking for because they may not meet the criteria in terms of size, flow, profitability or risk. Our unique position in the market and high level of capitalisation allow large brokerages like ADS Securities to play a crucial role in supporting FX trading.”
