This article examines the world of the non-bank FX Broker firms that operate around the globe; the most sophisticated ones offer a full range of currency and interest rate products plus currency payment products (such as payment cards) and highly functional dealing platforms to assist corporates who trade but don’t hold bank accounts in multiple currencies. With increasing foreign trade and more exotic currencies, it’s essential for corporates to have immediate access to adequate currency trading facilities to protect themselves against global currency volatility.
I was recently excited to see the arrival of global regulated FX and money transfer firm AFEX into the competitive corporate market of Manchester, England; this is a first to my knowledge, as until now all non-bank service providers have operated from 200 miles away in London. As a corporate treasurer, having immediate and direct local personal access to a range of professional currency risk management products in my region is a major attraction and AFEX should be congratulated in taking the initiative to bring sophisticated risk management services to a major UK business hub.
This also caused me to examine the wider benefits and risks that surround this industry, backed by negative publicity, not least from the banks who are in direct competition with FX firms, and who will seek to highlight the risks of dealing with unregulated firms. Risks do exist due to the many cases of fraud, scams etc. where (surprisingly in a heavily regulated sector) some unregulated firms have made criminal gains by persuading an unsuspecting client to remit funds for a deal that doesn’t exist.
However, there are very compelling reasons for corporates to use independent currency management and payment service firms, provided that they are careful to exercise the correct level of due diligence & establish the credibility of any Forex dealing services firm making a sales approach. As an ex-banker, we were always taught to be wary of the industry as a whole; some of this was to enhance the bank sales pitch though there was also a healthy suspicion of all non-banks without too much differentiation between providers. However, there are some major players in this industry who are properly registered, professional and legitimately operating under the national regulations of the financial markets they are working in, providing a vital service to the large community of corporates who can’t access the mainstream bank products.
The real driver for many corporates considering using an independent provider is not price or competitive edge but quite simply the greater availability of the credit facilities necessary to create a portfolio of currency hedges to protect their business, where limitations of bank credit facilities is an increasing worry.
In my previous blog post on the issue of FX, I mentioned that many corporates don’t have true visibility of their FX flows and are unable to pro-actively hedge their FX exposures. However, of equal importance is the fact that any corporate wishing to trade forward looking FX contracts needs a specific credit line for dealing from the mainstream banks and for many companies the squeeze on corporate credit facilities means that there are no facilities left over for hedging.
Faced with FX volatility and lack of bank credit lines, the logical alternative is to work with an independent FX dealing firm who are more open to providing dedicated FX credit facilities; the ability to hedge currency exposures is critical in minimising the P&L risk of having unhedged currency flows and the importance of having this capability cannot be understated.
For those firms who wish to do due diligence, regulatory bodies such as the UK Financial Conduct Authority (“FCA”) have created public registers of brokers authorised to trade in those jurisdictions which are a good starting point to investigate the validity of someone making a sales call.
But what’s the best way to go about using non-bank FX Broker firms?
The soundest advice that can be given in such a short article is that any corporate looking to use non-bank providers for currency services, should enforce the highest standards of regulatory checking, asking lots of validating questions to the provider including who their banks are (firms that hold their operational accounts with global banks have to jump many hurdles to hold those accounts); who their shareholders and / or financial backers are and if possible to obtain some good references. There are two key pieces of advice to further test the integrity of the firm you are considering dealing with:
- Seek further information about the key risks and downsides of any proposed currency strategy particularly if a lot of benefits are being offered and very few disadvantages or risks.
- Ask the FX company to provide the FCA registration number of the individuals who are providing strategy advice; it’s not enough to know that the provider is regulated but also the people responsible for customer strategy advice.
Faced with the decision to hedge or not to hedge a volatile set of flows, the treasurer has to use all the tools at his disposal and my own personal dealings with FX industry firms have been very positive, but were also based on rigorous questioning of the companies speaking to me; these have definitely enabled me to obtain hedging facilities that could not be obtained from the main banks and provided valuable P&L protection for the stakeholders of those businesses.