Noble FX – the first service introduced by non-fractional reserve bank Noble Bank International (NBI) – is designed to enable counterparties to clear, net and settle spot FX transactions in real time. It was announced for release in May.
According to the bank, Noble FX is a response to years of decreased access to credit constraining FX trading, as increased fragmentation, expensive post-trade mechanisms and burdensome regulatory capital requirements force traditional providers to reduce their client lists and cut credit to existing clients or even exit the market.
Various products and services designed to reduce post-trade costs have been introduced in recent years. In late 2015, Jerry Norton, vice president financial services at CGI, told Euromoney that the market needed a more radical approach, such as moving to post-trade ‘utilities’ supported by standard technology components.
This is the strategy adopted by NBI. “We are a utility delivered as a bank,” explains CEO John Betts. “[However], most utilities are restricted in terms of who can use them – our model provides open access to all counterparties.”
 John Betts, Noble Bank International |
According to NBI, clients can be live in as little as one week and all they need to do to join a credit pool is sign on to the established rule book. Creating a pool involves configuring a rule book and inviting participants to join. NBI claims that with fees below $5 per $1 million transacted and no minimum ticket sizes or fees, it has the potential to significantly reduce client costs.
One of the reasons why post-trade has remained expensive in FX is that there are a large number of providers, each specialising in a single client sector and some linked to facilitating execution. This creates a situation where each solution addresses the requirements of a specific workflow or set of functionality.
Betts is reluctant to suggest that there are too many FX post-trade providers, though, merely stating that the important factor is who gets access and how they interoperate. He is also at pains to state that NBI’s objective is to help the FX market with increased credit access and decreased post-trade costs rather than replace any traditional providers of these services such as prime brokers or exchanges, and says there is an opportunity to help those providers service more clients at better margins.
Connecting institutional participants in a peer-to-peer manner is one of the stated goals of Noble FX. Institutions have been slow to embrace peer-to-peer FX, but Betts is confident that the bank’s approach can win them over.
“The legacy model of peer-to-peer implied full counterparty credit risk exposure,” he says. “Our model allows customers direct access to the collateral that backs every transaction, which is visible and legally encumbered to the participants in the transaction. Peer-to-peer risk has been reduced to solely market tail risk, for which we also have a quantitative solution.”
The company is unwilling to share any timeframes within which it plans to reach a critical mass of clients. However, the strategic partnership entered into with Seabury Global Markets earlier this month will give it access to the FX liquidity management and trade execution solutions provider’s institutional customer base for its FXone FIX and GUI software applications.
Seabury Global Markets has also established a prototype private credit pool for customers in the form of a net settlement overdraft facility linked to real-time, post-trade services.
Instead of relying on a closed group of members who provide their balance sheets, NBI’s settlement protection will be covered by the cash collateral of participants, creating a model of secondary insurance as an investable asset class that delivers daily liquidity.
“Think of it as clearing or balance sheet as an asset class,” concludes Betts. “No one has ever opened up the risk/return profile to investors who will provide this third party coverage for a fee.”
Based in Puerto Rico, NBI is regulated under US federal law. As a non-fractional reserve bank, it does not lend or re-hypothecate client assets – these assets are legally segregated in the name of the client and held at the bank’s global custodian.
