Crackdown on FX vendors could raise costs for dealers

MTF designation could cost aggregators and EMSs $3m to set up and $1m in annual maintenance

Key points Summary Q&A

• Citi warns that new regulations requiring FX technology vendors and platforms to register as multilateral trading facilities may raise costs for FX dealers and clients.
• The UK’s FCA and the EU’s Esma have laid out stricter guidelines that affect technology firms facilitating price negotiations.
• Setting up an MTF could cost vendors over $3 million, with annual maintenance exceeding $1 million.
• Increased regulatory costs may lead to a shift back to larger, incumbent trading venues as smaller vendors struggle to comply.

These summaries are generated by an LLM, but edited by humans.

Vendors that must register as multilateral trading facilities (MTFs) may end up passing increased regulatory costs on to foreign exchange dealers and clients, according to Citi.

Stricter guidance from the UK Financial Conduct Authority and European Securities and Markets Authority issued at the end of last year will require technology companies that facilitate price negotiation between counterparties to register as trading venues.

It means many firms, such as aggregators and execution management systems (EMSs), that previously claimed they did not fall within scope of the regulation will have to devote resources to ensuring compliance.

It could also see the costs being passed down to liquidity providers (LPs) connected to these vendors in the form of increased fees.

“The regulators want to encourage innovation through competition, but at the same time want greater adherence to regulations and we’ve seen costs rising as a result of this,” says Ned Mawby, a vice-president in the FX electronic trading, platforms and distribution team at Citi.

If you are a smaller vendor, the costs are going to hurt a lot more. So, I think the dynamics have shifted back to the larger venues

Ayesa Latif, Citi

These technology firms that had enjoyed competitive advantage by being out of scope of the rules may be forced to divert resources needed for product innovation towards maintaining compliance.

Market sources say the cost for a vendor to set up an MTF could be upwards of at least $3 million, with costs of more than $1 million in annual maintenance and reporting.

If they do not comply, it could mean vendors will no longer allow clients to use their software to access bilateral liquidity as that would risk bringing them within scope of the rules.

The regulations are expected to come into force in the UK and EU member states from September this year.

The move comes at a time when a number of trading venues are increasing fees. It is understood that London Stock Exchange Group’s FXall increased fees in March due to regulatory costs, the first change to its fee schedule since 2023. In April, Bloomberg’s FXGO introduced a fee schedule for the first time due to the cost pressures of running multiple regulated venues.

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Citi’s annual FX vendor review found that 85% of clients responded that they have requests for their primary vendor, which includes both EMSs and incumbent trading venues, to invest in platform and service enhancements, specifically in execution and workflow solutions.

“Clients are demanding more from their vendors, who are already maintaining multiple regulatory venues as well as their existing infrastructure stack, and that burden is growing and will detract from what they can spend on innovation,” says Mawby.

Several new FX venues have entered the market having registered or being in the process of registering as an MTF, including OneChronos and OptAxe.

But with the increased regulatory costs on smaller and newer entrants, flows may divert back to incumbent platforms.

“The incumbent vendors often pass some of these costs to us, but it’s not directly passed down to the clients. Whereas if you are a smaller vendor, the costs are going to hurt a lot more. So, I think the dynamics have shifted back to the larger venues,” says Ayesa Latif, global head of FX product at Citi.

Direct line

The survey also found that 90% of Citi’s clients were satisfied with their primary vendors, while the number of clients saying they would switch vendors fell from 51% in 2021 to 22%.

Mawby says many platforms have become ingrained in the execution workflows of buy-side firms, especially in the case of asset managers, making it significantly costly for them to switch between providers.

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But for hedge fund clients the increased volatility in the FX market has seen a return of flows through direct liquidity channels, either through application programming interfaces (APIs) or single-dealer platforms (SDPs).

“In the leveraged space, they went down this aggregation model a number of years ago. But this year, due to concerns around stability, they’re looking to come direct to the LP,” says Mawby.

“This year, in terms of revenues and volume, we’ve seen greater growth on our SDP than other multi-dealer channels.”

Latif adds that these trends are often cyclical – when there is volatility and liquidity becomes scarce on third-party aggregators, then volumes on the SDPs often spike.

Furthermore, some of the more sophisticated hedge funds have been building in-house aggregators that can connect directly to an LP’s price stream. But Latif says some of the multi-dealer platforms have also been trying to improve functionalities that can interact with dealers’ API-based pricing.

“We’ve invested a lot on the e-trading side to reduce latency in pricing, and multi-dealer platforms could not benefit from that because they would not upgrade to our latest specs. But what has been happening over the last couple of years is clients recognise that vendors are reinvesting, and vendors also now are realising that there is a true benefit to partner with their LPs,” she says.

Editing by Joe Parsons