Vincent Bonamy, Head of Global Intermediary Services, GFX and Commodities at HSBC in London, spoke with Markets Media about the bank’s focus on transparency, automation, and efficiency.
Can you talk about your role at HSBC and how it has evolved since you joined in 2016?
I lead Global Intermediary Services, which is part of Global FX, Commodities & Emerging Markets Rates, within HSBC’s Markets and Securities Services (MSS) business.
I sit on the Global FX, Emerging Markets Rates & Commodities Executive Committee, running the fee-based (or pre-agreed spread) business, which provides pre-trade, execution, and post-trade FX Services. Within this, we also offer partnership FX Services at a macro level or more of a ‘pick ’n mix’ micro level of services for financial institutions, dependent on the partnership requirements. We see some great opportunities in this sector.
Additionally, within Global Intermediary Services, we offer a range of Alternative Execution Services, FX and Precious Metal benchmarks, and FX Algos, plus we have an innovative and award-winning FX Prime business.
The HSBC FX Portfolio Optimiser tool, for example, gives our FX Prime clients the ability to view compression and collapse trades. And our FX Custody business provides FX Services linked to securities settlements to custodians and other third-party clients across 17+ locations globally.
Together, this range of FX Services provides our clients with what they want most – transparency, automation, and efficiency.
Having a symbiotic relationship with our clients is important to us, meaning that we are trying to provide more than a client and provider relationship. Through constant dialogue with our clients, we are continually adding services and creating innovative products deemed suitable for their needs. This also allows us to expand our client base, not just in terms of numbers, but by the types of clients and geographies.
In terms of outsourcing, is that a trend you’re seeing in FX?
We see that clients wish to create partnerships based on their FX requirements, to help create efficiencies. Some of these operational efficiency options may lead to a discussion about outsourcing certain services, but it is only through this type of partnership that we can deliver the best solution for clients and the operational efficiencies that they need.
Which types of outsourced services are you providing and who is the client base? We offer mostly FX risk management and automated execution, which is always based on pre-agreed criteria and determined by the client, primarily for large asset managers, asset owners, banks, and more recently, corporates.
But it really depends on the philosophy of the client. We have a lot of clients who decide to use the services of HSBC for part of what they do whilst they retain other roles within their business. So, we offer every client a menu of FX Services, where the client can choose an array of different services they require. There are some clients who want to be in control for certain currencies but require our expertise for other currencies. So really, it’s quite diverse.
With the move to T+1 settlement in the US just a couple of months away, what are you hearing from clients?
For clients, T+1 does create some challenges and potential stress points, especially for those clients based in Asia who don’t have 24-hour desks, particularly when executing their FX linked to US equities. With the shorter timelines to complete funding, new stress points are brought into play. For example, what happens when settlement on a base currency of the funds falls on a currency holiday?
We have a specific offering ready to help answer our clients’ T+1 challenges, especially during holidays. However, there is more to our product solutions than finding one issue and fixing the problem. We want to provide the flexibility to clients that enables them to have choice around how we pass hurdles, together, as a partnership.
Could you give me some examples of the types of services that you’re providing?
What we’re proposing is automation, in a very flexible and controlled manner. Our goal, therefore, is to combine the power of automation and all the related efficiencies you can expect from automation, while giving our clients full control and a lot of flexibility. So, every client can decide how the automation is being done, creating greater efficiency and added value for the client.
For example, we are automating FX linked to custody. The client will be able to choose the time of their execution themselves, and this can differ greatly by client, giving them the flexibility they need. How a client executes can also differ by type of ticket – for example, a dividend payment can be selected to convert, on pre-agreed terms, to the base currency on an automated basis whereas, for a fund injection, the client could opt to execute direct with a trader or indeed via an algo.
Something also quite important in providing efficient and automated services is to have a user interface that our clients understand, through a dynamic format so they can see exactly what is happening in real time. They see tickets coming in, how the orders have been created, how the orders have been executed, for example. And after that, we can then provide reporting with full transparency.
In terms of T+1 and the services you’re providing, are these new ways of providing existing services or are these new services?
It’s existing services that we have leveraged and improved. We have also increased our trading and liquidity provision because there will most likely be a liquidity need at the end of the New York day and during holidays. So, we have leveraged and improved our existing automated FX Services and increased our liquidity provision to address client needs linked to the specific challenges of T+1.
Is there one prevailing way clients in Asia are planning to manage the shift?
Some clients are considering increased automation, encompassing the flexibility of execution in certain scenarios as I mentioned previously. What I have seen is that clients are looking more closely at their own back-office processes, to create efficiencies wherever possible. This, combined with our product suite, gives our clients that optionality I have discussed. We have several clients doing this.
Several years ago, some banks scaled back on the types of clients they serviced through FX Prime Broking. How does FX Prime fit into the overall Global Intermediary Services offering at HSBC?
FX Prime plays an important role, because there’s a client segment that is very dependent on it. There is a real need to connect clients with banks and liquidity providers. There have been some banks retreating from this business, and others expanding, but what’s important is to be more precise in how you manage your FX Prime because there are many complex factors to take into consideration to run a profitable business: risk, collateral, leverage ratios and financial KPIs.
Can you give some examples?
There are new capital measures such as SA-CCR that may affect the profitability of our clients. We need to be aware of how we can best support our client base, knowing these new measures will be in place soon.
Is HSBC re-evaluating the types of clients that you service through FX Prime?
No, because we have been very steady and stable in our FX Prime strategy, which includes focusing on synergies between the clients’ requirements and our global FX franchise. We take a lot of time before we onboard a client to really understand what the client does and ensure that our risk parameters are really well designed for their particular type of trading.
In fact, one of our strengths has been that we have been a very stable and strong partner. At the end of the day, that’s what is valued most by clients. They’re depending on their FX Prime. It’s a vote of confidence from the client.
Do you see specific challenges with the development of multi-strat hedge funds?
The challenge it has created for us from an FX Prime standpoint is that now within the same fund, you have people that have different styles, even on the FX side – funds that are more macro, more low-vol, more interest rates. With the new interest rate regime, we have seen people using FX and especially FX swaps, to express a view on interest rates. This means that we also need to have some specific risk parameters that are a little bit different for these funds. We have introduced some interest rate risk parameters under some specific FX swap activities that are more interest rate than FX in terms of a key risk.
The challenge of multi-strategy funds is to have risk parameters that are well designed for the different FX strategies happening within the same fund, but by different pods – this includes very high frequency quant pods, global macro with a directional view, vol pod, or an interest rate swap pod. It’s a matter of knowing what the client requires and having the right risk parameters to understand these different pods. So, we must accommodate this in our offering and it’s something we’re doing consciously.
Are there specific challenges in the development of ETFs?
Passive managers and private asset players have some specific FX needs, so we have developed FX Services dedicated for these types of clients to help them reduce tracking error through index replication. Even though FX is a well-established industry, you always need to adapt your offering for new types of clients.
What do you see as key challenges for the FX industry?
I think the number one challenge is settlement risk, and its rise is demonstrated in the BIS reports. There are some non-CLS currencies that are growing, which means settlement risk in the FX industry is growing. This is why you see companies such as OSTTRA launching on-demand, payment-versus-payment services to mitigate settlement risk for non-CLS currencies.
