Asia Risk interdealer rankings 2010: Brokers

Interdealer brokers were being given a bleak long-term prognosis by some members of the banking community last year amid predictions dealers would clear less business interbank. For now at least, the majority of brokers are reporting significant increases in volumes in Asia. Harry Thompson reports, with research by Basil El Khawad

Interdealer volumes traded by brokers were once more on the rise in 2010, due in part to significant inflows of funds into the Asia-Pacific region. Steve Miles, managing director of Tradition in Singapore, estimates volumes in the market for 2010 increased by 8–10% on the previous year, with the figure for Asian interest rate swaps (IRS) and Asian non-deliverable forwards (NDFs) hitting as much as 30% growth year-on-year. "Your traditional cash product - your real money, is more flat – credit has been flat," adds Miles.

Other brokers report similar broad rises on 2009. "We've seen a good year this year – volumes [have] come back into the Asian market. In 2009 Asia was hit harder than the rest of the globe, but in 2010 the recovery has been strong," says Barry Dennahy, Tullett Prebon's chief executive for Asia Pacific, based in Singapore. "We're certainly coming back to pre-crisis levels."

Similar to their dealer clients, interdealer brokers note the importance of money flowing from outside Asia into the region, typically searching for yield, as a major theme for 2010. "It's been pretty significant since the start of this year. It might only be a Bric [Brazil Russia, India, China] fund operating out of London, but whatever the source, investors have got to have exposure to India and China, so clearly money has flowed out from the West into the East," says Miles.
Dennahy takes a similar line, saying: "The world is looking to Asia for future growth, given the limited options in other regions."

These fund flows from outside the region as well as intraregional activity benefited local markets. "This year, in particular, we've seen the return to more regional currencies. In 2009, we saw the risk appetite for so-called ‘illiquid currencies' as limited. Investors wanted to take the liquidity back home. The problem in 2009 was that if you felt you may have needed to get out of a risky position, liquidity may have meant that it was difficult to do so," says Dennahy. However, with all the investor interest in the region in 2010 the liquidity has remained strong in local currencies and Dennahy cites India as a particular example where trading is proving much more liquid than in previous years.

Miles adds that Asia has seen continued growth in intra-Asian business, but that this has been a continuation of the general trend for growth rather than a response to the prevailing market conditions. Donald McClumpha, Icap's Singapore-based deputy chief executive and chief operating officer, says local banks have been active in some local currency markets, but activity from domestic banks tends to be very market-specific. McClumpha says local banks still do not have a significant presence in the core markets such as mainstream credit, where the international banks remain the biggest participants.

Brokers add that credit default swap volumes have seen something of a return. However, Miles says that although the market has improved, it comes from a low base in 2009 and levels of activity are still far from the levels witnessed in 2007. However, McClumpha says commodities in Asia are having had a particularly strong year. "It's been a big year for commodities - the commodities story is very much intact," says McClumpha. This November, Icap added a London Metal Exchange desk in Hong Kong, which McClumpha says is indicative of the growth in commodities in the region. He also cities the creation of the Singapore Mercantile Exchange, which opened for trading in August, but adds that ‘core liquidity' has not yet fully developed on this exchange.

Electronic trading continues to weigh on the minds of brokers the world over, and Asia is no different, although brokers note that inevitably the region is somewhat behind Europe in terms of sophistication. "The pace of evolution is different, but clearly there are natural attributes here that push for electronification. There are regulatory drivers here too," says Icap's McClumpha, noting the moves towards swap exchange facilities in Asia. "The anticipation behind that is that it is clearly expected to be something that is adopted by the Asian markets as well." He adds that it is difficult to make broad statements for all asset classes, but there is a case for migration to more electronic broking for more transparent and liquid assets in Asia.

All brokers appear relatively tight-lipped about revealing their precise plans for rolling out electronic platforms in the region – although Icap looks set to roll out its i-Swaps facility. But the consensus is that it is an important area of development.

"Obviously we're conscious of regulations and the future of any regulatory changes. We're also listening to clients. In certain products Asia will move to electronic platforms. London will be at the forefront, but it is only natural for Asia to look into this," says Dennahy, who declines to provide specific information, only saying that Tullett Prebon has seen growth in its Asian electronic business. "We're interested in electronic initiatives that are hybrid and assist our core broking business," says Dennahy, who emphasises the continued importance of voice broking for the region. "We believe in the value of the voice brokers, and believe banks still benefit from a good, voice-broked product."

Both Dennahy and McClumpha say voice broking allows traders to get a feel for the market and to see the flows, as well as better source liquidity, noting that with some of the more peripheral markets in the region, this kind of broking has even more relevance.

Offshore renminbi

Similarly to their dealer clients, brokers point to the development of the CNH market - the offshore market for Chinese renminbi-based trades in Hong Kong - as an important new development, with Tradition's Miles saying the market "just exploded in terms of volumes" since it started in July. "If you look at CNH trading and CNY trading, they have probably doubled in terms of FX derivatives or in terms of [cash] FX," he says.

Brokers are now lining themselves up for what is likely to amount to a substantial business, with Miles noting, for example, that Tradition is taking on staff in Hong Kong and has set up a new CNH desk in the territory, trading spot CNH, forwards and deposits.

Tullett Prebon added staff in Shanghai this year and is looking to expand in Hong Kong in 2011 to take advantage of renminbi activity. Dennahy says the onshore market in China is developing for money markets, interest rate derivatives and bonds. "Hong Kong will develop faster than the mainland market, at least in terms of product range," he adds.

Icap also expects a pick-up in the CNH market in 2011. "The growth in spot currency trading is relatively nascent, but that will accelerate through next year. Clearly, the CNH deposit market onshore in Hong Kong will continue to build, and from that will come an active cross-currency swap market between CNH and US dollar and CNH and Hong Kong dollars," says McClumpha. "The RMB denominated eurobond market is beginning to mushroom. Companies are coming to Hong Kong, to raise finance in RMB, through the eurobond market here. As that builds, the secondary market will begin to grow, and from that will flow additional trade activity."

McClumpha adds that there are still a number of milestones that need to be reached before the Hong Kong CNH market is fully developed. "For an effective active secondary market, inventory's got to build. That takes time, and you can't be prescriptive about how much time. Inventory has to build to such a level where there is enough secondary market activity that banks want to trade," he says. "I would suspect that some time by the end of [2011] we're going to have a much more active secondary market environment in CNH denominated products in Hong Kong."

McClumpha also cites the need for a China interbank offered rate (Chibor) market. "For an active interest rate swap market to properly grow up you need to have a Chibor index here, I think there are moves afoot through the various associations to make that happen."

However, McClumpha says other aspects of market development are still far from clear, despite the recovery from the financial crisis that started in the second half of 2009 and has been maintained in 2010. "Given what we've seen unfold in Europe over recent weeks, given the prospect of QE2 [second quantitative easing in the US], given the unprecedented amounts of liquidity that's found its way into fixed income markets in general and Asia in particular, I think the difficulty now is what happens next," says McClumpha.

"There's been an element of de-risking going on across the spectrum because of the uncertainty. You've seen the consequences of the excess liquidity that's being generated out of Europe and North America - a lot of that liquidity is finding its way into Asia. Peripheral Asian markets have been the beneficiaries of fairly significant capital flows."

McClumpha says Asian market participants are already anticipating further quantitative easing from the US and have positioned themselves accordingly. "The prospect of QE2 is not whether or not it will happen, but whether or not the slated amount will be increased - and I think that has a bearing on the economic data that comes out of the US," says McClumpha. "This is a very difficult set of paradigms for traders to evaluate, and it's very difficult to call what impact that's going to have on our volumes going forward."

How the rankings were conducted

Polling for the Asia Risk Interdealer Rankings 2010 was carried out online in September and October by canvassing the votes of thousands of dealers and brokers in the region.

Participants voted for their top three derivatives dealers and top broker in order of preference across interest rates, foreign exchange, credit and equity for the past year.

Voters could base their choice on any criteria, such as pricing, liquidity provision, reliability or electronic trading capabilities. Three points were awarded for a first place, two for second and one for third. No weighting system was used for brokers, as respondents only submitted one vote.

Respondents could not vote for themselves or subsidiaries of their companies. Asia Risk vetted votes and discarded invalid votes, including those based on a perception of a dealer's or broker's capabilities rather than on a genuine trading experience. More than 880 responses were received this year. Most of the votes came in the interest rate and currency derivatives categories, with voting numbers significantly lower in credit and equity derivatives. Voters were based across the Asia-Pacific region. The categories were largely similar to 2009. Only categories with a sufficient number of votes are included in the final rankings.

Legal disputes over staff resurface

Interdealer broker headcounts were either flat or up modestly in 2010. "We're seeing growth across the board, including good growth in Singapore, Tokyo, Hong Kong and Sydney," says Barry Dennahy, Tullett Prebon's chief executive for the Asia Pacific, based in Singapore. "Headcount has not been hit by the moves to increase electronic trading."

Steve Miles, managing director of Tradition in Singapore, says his company is now making a significant investment in staff and technology. "This is hiring time - we've invested a lot in HR and technology - and I don't see that changing," says Miles.
Tradition's ambition to become the pre-eminent broker in the region has led it to raid rival Icap for 38 of its staff based in Singapore. Icap has vigorously resisted the raid, getting an initial injunction from the Singapore high court, and subsequently suing both the 38 staff and Tradition. Icap has claimed a breach of employment contracts, and contested the move on the basis that the staff had access to confidential data including lists of clients, trading strategies and brokers' pay.

The legal spat has drawn parallels with earlier public disputes several years ago, which often did not reflect well on any of the parties involved. However, Tradition's Miles tells Asia Risk that "38 brokers from Icap will be joining at various dates between now and February 1".

Parties to the dispute note that there will be ongoing litigation, however. Some market observers believe a successful injunction by Icap could potentially have forced brokers to abandon the practice of mass poaching - a longstanding way of growing teams and business - if it became legally too onerous. But Miles says this view is not really correct, highlighting that the market has seen prior examples of legal disputes that have not changed practices. "There is a lot of litigation around the world between brokers," he says. Tullett Prebon contested the poaching of 77 of its staff from its US operations by BGC, for example.

However, the spat between Tradition and Icap is the first major legal dispute in the region for some time, with most disputes during the past couple of years having tended to be resolved behind closed doors.

"It is not unusual for there to be litigation between brokers. However, where we thought we'd got to is that brokers had a much better, much more pragmatic relationship over the last few years, where at the end of the day broking companies between themselves can sort this kind of thing out without going to court," says Miles. "There's been plenty of poaching over the last two or three years, for instance in Singapore, but the fact is between the heads of each institution, before it gets to legal and everything else, we've sorted [it] out... It's been a two-way flow that can be resolved for the mutual benefit of both counterparties. So it is disappointing when we can't do it that way."

Icap's Singapore-based deputy chief executive and chief operating officer, Donald McClumpha, declined to comment on the litigation and staff moves.

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