LOOKING OVER THE FENCE.
Ryan Nettles, Head eForex Trading & Market Strategy, Swissquote Bank SA speaks to Best Execution and gives a market perspective from the retail side of the FX trading community.
What are the key regulations impacting your industry at the moment, and what is their effect?
There’s no shortage of regulation, but key at this time to our business are the Pre- and Post-trade Transparency rules and Trade Reporting requirements coming into effect under MiFID II, and the FCA Proposal for Policy Changes. Specifically, those proposals related to:
- Leverage Limits on Contract for Difference (CFD) products – which proposes a maximum of 25:1 leverage for retail clients with less than 12 months active trading experience in CFD products or other relevant margined products, and/or a maximum of 50:1 leverage for experienced retail clients, which are set according to the volatility of the underlying asset.
- Prohibition on bonus promotions – whereby firms would be prevented from using any form of trading or account opening “bonuses” or benefits to promote their retail CFD products and platforms.
In addition we have to be mindful of the Cyprus Securities and Exchange Commission’s (CySEC’s) proposal for Handling of Client Monies, which was published in October. Under these proposals Cyprus Investment Firms (CIFs) must ensure that client funds are held in accounts separate from CIFs own funds. Also, client funds can no longer be used to margin positions for CIF’s own account trading.
The effect for the retail broker is that these regulations will further increase costs, there will be potentially less client trading volumes and it will be more difficult to attract new clients.
How will different sized brokers be impacted?
The upcoming regulatory changes will potentially have an impact on all retail brokers, but the impact will vary depending on several factors. One will quite simply be the dependency a broker has on bonus promotions to acquire customers.
Another factor will be the amount of leverage the broker offers a client. For example, a broker offering leverage of 100:1 will be less impacted than a broker offering 500:1 leverage. The brokers who will have to reduce leverage for clients who historically were offered higher leverage will be impacted from lower client trading volumes or losing the client to competitors who are regulated by other jurisdictions.
Furthermore, there will be a cost to adjusting technologies to be regulatory compliant which will be more challenging for smaller companies as they may not be able to support these increased costs.
In conclusion, the larger capitalised brokers will be able to mitigate these regulatory changes better than the smaller undercapitalised brokers. As a result, I foresee some consolidation in the European retail FX broker space once these regulations come into play.
What challenges do brokers with smaller marketing budgets have and what alternative schemes will they have to devise to better compete against firms with large marketing budgets?
All brokers will need to cope with challenges related to the planned regulations. The cost of client acquisition will continue increasing and brokers with smaller marketing budgets will have a difficult time competing against the brokers with large marketing budgets. Brokers will need to be more creative and focus on schemes that optimise client acquisition and retention in addition to identifying ways to increase client trading activity.
How have political events such as Brexit and the US election impacted the industry and the firm?
As with regulatory change, political events can also impact the retail FX industry, but it is too early to say how these specific events will impact the industry longer term. However, we are busy analysing all the various potential scenarios and outcomes.
What difference will a divergent interest rate policy make?
Other than political risk, I believe monetary policy divergence will be one of the main drivers of FX volatility in 2017.
Do you think that your credit and liquidity provision business will increase?
Over the past several years, the primary Tier 1 Banks offering FX Prime Brokerage services have significantly increased their thresholds regarding whom they can do business with. As a result of these increased thresholds, an opportunity has been created for other institutions to fill the gap, which has been labelled ‘FX Prime of Prime’.
In addition, the upcoming regulatory changes related to the treatment of client monies by Cyprus brokers will reduce their own account trading and will force many retail brokers to get access to credit and good liquidity in order to sustain profitability. Swissquote Bank entered the FX Prime of Prime space to help fill this void and support those institutions with their credit needs and access to liquidity, and I feel this business will further increase in 2017.
How do you see the retail platform business evolving over the next year – will there will new players?
I believe retail FX platforms will need to evolve by strengthening trade transparency based on the upcoming MiFID II regulations. The most popular retail FX platform is MetaQuotes’ MT4 and this will continue to be the case in 2017. MetaQuotes will continue to push their MT5 platform, which will help solve some of the constraints related to MT4 for brokers such as business scalability, but some traders may not be open to move to MT5, thereby opening opportunities for other retail platforms to compete if they can be more flexible in fulfilling the regulatory, broker and trader needs.
How do you see automation and other technologies developing over the next year?
Once a retail trader has decided to open an account with a broker, they are looking for easy and fast onboarding and payment processing. The broker’s revenue is impacted by how efficient their onboarding is. As the saying goes ‘time is money’. Technology vendors that are able to improve the automation of onboarding and payment processing within the broker’s regulatory framework will be in demand in 2017. In addition, I see a further increase of algo trading strategies, so tools for traders that can easily create, analyse and execute automated trading strategies will be in high demand.
Aside from your retail clients what do you offer the institutional investment community, such as asset managers? Is this a growth market for you?
Yes, Swissquote Bank is already active in the institutional space for asset managers, banks, brokers and corporate clients and we offer the full product range as well as access to credit and margin facilities, liquidity, execution and technology solutions. We have dedicated teams focused on the various clients within this institutional segment and it is fast growing business for us.