Foreign exchange prime broker of the year: HSBC

Risk Awards 2021: diligent approach to risk management brings new clients to UK bank

Brian Horgan, Gemma Laman and Vincent Bonamy

Geraint Roberts

The coronavirus unleashed chaos in the markets and sent economic shocks across the globe last year. Navigating the Covid-driven volatility and the liquidity drought that followed it was no easy feat, but one foreign exchange prime broker stood out, continuing to provide its clients with access to credit through the March madness. 

HSBC’s foreign exchange prime brokerage (FXPB) unit passed the test with flying colours thanks to a strong risk management framework and a close relationship with a pool of clients that it was able to expand despite the crisis.  

“Preparation pays dividends,” says Brian Horgan, global head of prime and derivatives clearing risk at the broker. “We spent a lot of time with our clients preparing for how to manage through the volatile period. Because we’ve done that, we sort of go into those periods with a high degree of confidence.” 

This diligent approach to risk management paid off. Despite the adverse market conditions, HSBC added seven new clients and onboarded 50 sub-funds in 2020, which helped to increase overall client assets under management by 20% year-on-year. 

The current 57-strong client list comprises hedge funds, asset managers, corporates, regional banks and pension funds. This allowed HSBC to post a 15% year-on-year growth in revenues in its FXPB business.

The saying goes that strength can be found in numbers, but in the case of the broker, building and maintaining strong relationships with its client base is what matters most. Clients say the relatively small size of HSBC’s FXPB business is one of its greatest assets. 

“We didn’t know their FXPB product, but we’re glad we took the risk,” says one client. “They didn’t have so many clients as others, so it was a red carpet. The sense of proximity was closer than others.”

Blank slate onboarding

HSBC believes the key to avoid being caught off-guard when things go south is a forensic approach to risk management during the client selection process, and a subsequent real-time risk monitoring. 

The broker approaches each new client relationship as a blank slate. This allows HSBC to fully understand what types of strategies the client is planning to run and where the key risks lie. Subsequently, the FXPB team determines what kind of risk management parameters must be put in place for each portfolio and customises margin models accordingly. 

“Risk is not science, it’s art, so to speak,” says Vincent Bonamy, head of global intermediary services for FX and commodities at HSBC. “You could say we see each client as an individual rather than an abstract painting, so that we can better understand, for example, what they might be hedging and how they plan to manage their overall position, including primary and secondary sources of risk,” he adds.

What we want the clients to be doing is managing their risks effectively. If they do a good job of that, then we think we don’t need to impose our risk management on them

Brian Horgan, HSBC

All risk parameters are pre-agreed with clients so that they are aware of the kind of risks the bank is willing to accept, but the business allows for auto-adjustments should a client decide to change their positions in response to market moves. 

“We found this approach more pertinent than ever for helping us to manage our risk limits in relation to those of our clients during the market volatility we saw during the pandemic,” says Bonamy. 

Once clients are onboarded, the broker believes it’s important to spot potential issues before they become bigger problems. This is done by leveraging clients’ existing relationship with other parts of the business, allowing them to access real-time information to help their decision-making process.  

This level of real-time market intelligence and constant engagement with clients means the broker can monitor market volatility while at the same time understanding how clients intend to manage their risk and remain flexible with their risk parameters. It is the reason why HSBC’s FXPB was able to navigate perilous market events in problematic currencies such as the Turkish lira and the Argentine peso without having to raise margins or step away from the market.

“What we want the clients to be doing is managing their risks effectively,” says Horgan. “If they do a good job of that, then we think we don’t need to impose our risk management on them.” 

Open communication

To ensure good risk management on the client side is in place at all times, HSBC leaves no room for ambiguity. Communication is open and frequent, so that clients know what the broker is comfortable with from both a risk and regulatory perspective. 

This boutique feel has allowed the broker to be aggressive on pricing while also remaining flexible and nimble with its customer service, and better at providing bespoke solutions that cater to clients’ specific needs.

“HSBC is at the top of my panel because it’s a tailor-made solution,” says a second client. “The proximity is there, you feel safer.” 

The feeling of safety is by no means a coincidence, but it’s in line with the message HSBC wants to convey to its clients. Customer service is what drives the broker’s offering, not volumes, says Gemma Laman, global head of FXPB.

“We don’t look to be the biggest FXPB on the street. We want to be the best we can be for our clients,” says Laman. “We can work with them to find solutions. We really do bring the bank to that client, and we can do that because we know those clients, we know their business, we know how they work, and we know what their concerns are.”