RBC aims for top 10; Canadian bank looks to capitalize on its credit rating

The bank, which last year came 18th and has been bubbling around the top 20 since the onset of the financial crisis, believes it is punching above its weight and can break into the top 10. For this year, Ed Monaghan, RBC’s London-based global head of FX, believes the bank can move up a “couple of slots” thanks to the work it has done creating new algorithmic pricing engines to connect to multi-bank platforms and a wholesale makeover of its single dealer offering.

“We looked at our whole electronic trading platform and it needed to be revamped from A to Z,” he says. “In 2011 we started to see the fruit from those labours and we saw our volumes pick up dramatically.”

Monaghan knows the bank's limitations, however.

Its inherently conservative culture means it is not going to chase leveraged accounts, but that conservatism has its advantages, helping to produce a balance sheet and credit rating that is attractive to real money investors and corporate customers.

To capitalize on that, the bank has invested in its electronic platform and is in the process of rolling out its revamped single-dealer platform (SDP), RBC DX, after launching it at the end of last year.

“One of my key observations when revamping our electronic platform was that we not only needed to drive more business, but it was also needed to remain competitive,” says Monaghan. “It was a combination of both.”

Staying in the game

To help stay in the game, RBC hired Stamos Fokianos, a veteran of Standard Chartered, RBS and Citi, as global head of FX eTrading to spearhead the rebuilding of its electronic platform.

Monaghan admits that the electronic platform he inherited when he took on his role in 2007 was not exactly state of the art.

However, he says the fact that RBC had not invested a lot of money in electronification put the bank in a good position – it meant the bank could do it a lot more cheaply than some of the pioneers in the sector.

“We were able to get to state of the art a lot quicker than anticipated, both by developing things ourselves and using off-the-shelf packages,” says Monaghan.

“To get us from nowhere to somewhere fast, we hired very good people who delivered exactly what they were asked to do.”

The bank engaged a two-pronged strategy, building a price engine to connect to multi-dealer platforms (MDP) and then moving to enhance the SDP.

RBC has started feeding FxAll, 360T, Currenex, RTFX and Bloomberg FX.

Fokianos explains that the development of the SDP – RBC has given it a new pricing engine and added a host of new features, including fixed-income and deposit instruments – came alongside its work on the MDPs, but its roll-out was deliberately held back until it was up and running in the MDP sector.

He says it is quicker to establish flow in the multi-dealer environment and the bank needed that flow to put its plans into action.

“It also raises the bar,” says Fokianos. “If you can compete in a multi-bank environment then the single bank is simple.”

Clear focus: corporates and real money

RBC is clear about the kind of business it wants to build, focusing on the value it can extract by servicing real money and corporate clients.

This has always been a focus for the bank. Last year’s FX survey showed that 43.72% of RBC’s FX volumes came with real money accounts, compared with an industry average of 17.34%. Meanwhile, corporates accounted for 16.77% of RBC’s volumes, against an average of 12.40% in the wider industry.

It says the strength of the Canadian dollar, and the stability surrounding Canadian banks and the country’s economy, have helped promote business with clients in those sectors.

RBC’s expertise in the Canadian dollar, in which it is one of the dominant market players, is often the starting point for the development of wider dealing relationships with clients.

The bank says it is active with central banks in the Canadian dollar, for example, but not just against the US dollar. It says that by working large orders for central banks in currencies other than the US dollar against the Canadian dollar, it can go under the market radar and offer better execution.

“We are focused on corporate and real money clients, not just clients that want liquidity off the platform because, in the long run, I don’t believe this will be good for us,” says Monaghan. “If we are going to make an investment, we have to make sure it adds value.”

As far as hedge funds are concerned, RBC is keen to avoid transactional relationships with high-frequency trading accounts, although it remains keen to develop relationships with hedge funds that are more directional of for whom FX is not their core business.

Fokianos says is it hard for the bank, given its relatively small market share, to get anything out of trading with high-frequency accounts, which, he says, mostly just play high-speed triangulation games – in other words trying to shave small margins from the difference in the spot prices of say EURUSD, EURCHF and USDCHF. “The value of the HFT business is debatable. There is a considerable infrastructure cost to even print seamlessly so many tickets. It is not clear that it contributes to true market liquidity rather than just creating volumes."

Options: a platform for success?

The next phase of the banks electronic development is set to occur in derivatives, with the rolling out of Cockpit, the bank’s internal options and non-deliverable forwards pricing engine, as it prepares for the post-regulatory trading environment of Swap Execution Facilities (SEFs).

In development for a year, Cockpit is “SEF ready” and could be used to feed prices on to the multi-bank options pricing platforms, such as Digital Vega, in the near future.

Folkianos believes that options will become the next big flow business in FX, a move driven in part by demand from corporate treasurers, who, he thinks, will move from using relatively crude outright FX forwards towards using options for their hedging needs as the market becomes more transparent.

“The buy-side is pushing for this,” he says. “For a corporate treasurer who wants to enhance the yield of operations, if you understand options and the premiums are reasonable, you have a better chance of managing your money better.”

For his part, Monaghan concedes that being a top-five FX bank is not a realistic ambition; RBC is not big enough and does not have the global footprint required.

He believes, ultimately, a place in the top 10 is achievable, but it has to be done by playing to the bank’s strengths.

“We’re hopeful we’ll move up a couple of places this year, but moving up in the real money and corporate world would suggest that what we are doing has worked and was right for us,” says Monaghan.