The new B2B service known as CFD Prime is part of the company’s FXCM Pro Initiative.
What does the new service offer?
CFD Prime will use FXCM’s balance sheet and infrastructure, some of which has been provided by asset manager Integral, to create what it describes as a central clearing function, that will reduce counterparty risk between price makers and price takers in CFD trading.
CFDs are traded OTC or off-exchange, an environment in which good credit lines and low credit risks are crucial.
Few margin trading brokers make their own CFD prices, however, relying instead on external liquidity provision.
But to access these pools of liquidity, the broker needs to have a line of credit with the liquidity provider or have the ability to place a substantial initial margin on account.
Something that many lightly capitalised brokers are unable or reluctant to do.
Using CFD Prime FXCM hopes to remove these credit barriers, and introduce the netting and margining benefits that FX market participants enjoy, when trading via a centralised clearing service, such as CLS Bank.
What are the benefits of centralised clearing?
In a centrally cleared system, the counterparty risks inherent in OTC trading are borne by the central counterparty.
On futures exchange, this is usually a clearinghouse which is often but not always owned by the clearing members of the exchange.
As such the central counterparty spreads the risk among all of its users.
At a wholesale level, the central clearing of OTC derivatives has become ever more popular since the 2008 Global Financial Crisis of 2008, which saw the collapse of Lehman Brothers.
In some cases, centralised clearing of derivatives and swaps contracts is now mandatory, even if the contracts are traded or originated in the OTC markets.
What’s happening in prime brokerage markets right now?
Large banks have been reducing the number of prime brokerage clients that they service and they are only interested in the top end of the market.
However, the collapse this year of Archegos, a multi-billion dollar family office, created massive losses for the industry and caused many banks to tighten their criteria further, and led to the withdrawal of Credit Suisse from the prime brokerage business entirely.
Prime brokerage services from larger brokers and so-called prime of prime providers are likely to become even more sought after against this kind of background.
This is doubtless why FXCM has chosen this moment to launch its own CFD Prime service.