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• 09.10.2020 01:15 pm
FX markets

It is a known fact that the e-commerce world faces a lot of competition in the world. Because of that a lot of banks are contemplating outsourcing a portion of their FX business to bolster their position in the Forex market.

Informal relationships in which smaller market participants rely on larger counterparts for better price and liquidity have long existed in the foreign exchange market. As a high-tech trade intensifies competition, more formal ties become commonplace.

Given the importance of the forex market for corporate clients, not many banks would dare to drastically reduce foreign exchange transactions. Instead, they would rather leave fields where they are unable to challenge others.

Simon Manwaring who is the leading figure of Forex trading at NatWest Markets declared that European banks had to focus on strengthening their positions in a number of market areas, and the inevitable consequence of this is the search for partnerships.

A road to digital

We should note that not only are banks teaming up with each other but also very closely collaborating with digital wallet providers like PayPal or Revolut to really calculate the volumes.

The FX market gets tough and banks have to work together. It usually means that they'll likely have a lot of influence, even if they are just commercial banks. These times are usually ripe with new regulation methods from the government and it becomes clear why FX regulation is important - the government is trying to somehow put the situation in a legal framework.

While outsourcing comprises only a small portion of NatWest's trading volume, Manwaring believes the method is beneficial for currencies or time zones where a particular bank has little geographic presence.

The lack of transparency of foreign exchange markets makes it infeasible to measure the scale of this practice, which is often referred to as “white labeling” because such a client always trades with and has access to his or her own bank.

Experts point to an increase in trading in the forex market, with the foreign exchange market share of the five leading banks growing to 41% in the first half of 2020 against 37% in 2016.

Swedish SEB is counting on other banks to supply liquidity in emerging market currencies and some FX options products, FX chief executive Svante Hedin told Reuters, adding that improvements in technology have notably accelerated outsourcing.

Other factors behind this process include declining profit margins and regulation. The European Mifid II, for example, requires banks and investors to provide the best prices for clients.

Measuring the prices at which foreign exchange transactions took place using the analysis of third-party transactions is now much easier than five years ago, market participants say.

Some of the biggest lenders alleviated fears that outsourcing would harden the overall situation, declaring that their dominant position and creditworthiness enabled them to offer customers the best prices in the safest way possible.

However, there are some barriers. Industry insiders point out that formal agreements between the two institutions are particularly harsh, as banks and clients waive exclusive clauses that restrict their ability to trade with other lenders.