Renewed FX interest by funds offers prime brokerage fillip

The return of funds to trading forex has prompted a boom in the provision of prime brokerage services. Banks such as Bank of America are hiring more staff to cope with the increased demand, while others, like UBS Warburg, are building online prime brokerage systems.

Prime brokerage, which allows forex clients to trade without a credit line, is particularly useful for fund managers, because they need to enter the market anonymously. And with a recent boom in the numbers of funds operating in forex, as currency markets provide better returns than the equity sector, demand for prime brokerage services has grown accordingly.

Hedge funds, another sector of the buy side, which are ideally suited to prime brokerage, have also become more active in forex following recent reforms in Europe of tax and pension laws.

Mark Clarke, global head of spot forex at CAI in London, identified clients such as funds and commodity trading advisers gaining access to wider availability of credit as the most significant trend likely to affect foreign exchange this year.

Online prime brokerage is expected to be a particular growth sector. One senior fund manager at a London-based asset management firm told RiskNews’ sister publication FX Week automated prime brokerage services would provide the advantage of centralised clearing, while a New York-based banker said traditional prime brokerage is prone to errors, which automation should reduce.

The banker said errors were frequent because prime brokerage relies on a bank and a client giving the intermediary details of a transaction. Some of that bank’s clients had reported errors in more than 60% of prime brokerage trades, the banker added.

Ellen Schubert, head of forex sales, North America at UBS, said electronic systems would make prime brokerage much more efficient both for banks and end users, because of the reduction in errors. UBS’s electronic forex prime brokerage service is set for launch in the second quarter of this year.