FX profitability across Client Segments

I have been reading some excellent research by ClientKnowledge, which compared bank FX profitability across client segments and geographic regions between 2009 and 2010.

So much great information contained in this chart.

Bank FX profitability by client segment /compared by region
SOURCE: ClientKnowledge Research 2011

A few points with regard to changes in profitability across client segments:

Falling profitability: Regulated segments such as Asset Managers/Custody have seen profitability drop dramatically in all regions, the most extreme being in Europe where profits from this segment are down from 18% to 3%.  Mid Market Corporates (who are mainly unregulated) have seen profitability almost half in all regions.

Rising profitability: By contrast, profitability from Wholesale Clients have almost doubled across the board, in the most extreme case rising from 19% to 53% in North America.

Unchanged Profitability: Principal Trading has remained relatively unchanged at between 25-40% depending on region, although under the Volcker Rules, much of this may have to be spun out into separate units.

This data seems to be consistent with the Bank of England FX Survey data which shows FX flows (not profitability) by client segment. Below I have shown a chart of the FX flows via multi-dealer platforms. As can be seen flows from “Other Financial Institutions” segments, which include asset managers and custodians have been rising steadily over the past two years.

Multi Dealer Platform flows by Client Segment
Bank of England FX Survey Data

At first glance, one could suggest a strong correlation between the rapid rise in flows from the ‘other financial institutions’ segment executed through multi dealer platforms, and the sharp collapse in bank FX profits generated from Asset Manager/Custodian flows, which is the same segment.

A forthcoming blog will look at profitability of flows between single and multi bank platforms, and I think many will be surprised to learn that average profitability of flows via SDPs can be many times that of the same flow generated through MDPs.

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