REDEFINING MONEY BROKING

What do you immediately think of when you hear the words ‘money broker’? Wildly gesticulating men and women, shouting ‘yours’ and ‘mine’ on a bustling trading floor with two phones pressed to their ears?

A ‘money broker’ is a person or organisation that arranges the lending and borrowing of money between banks or other organisations. Put simply, a financial intermediary providing access to markets and products for a commission.

As the financial crisis hit in 2008 and the banks funding from money markets dried up, traditional voice brokers were at the epicentre of information flow, with traders at banks trusting and increasingly relying on brokers as key conduits of information.

It’s now been over a decade of ultra-low interest rates, and in some countries, prolonged periods of negative rates. The impact from the coronavirus pandemic has seen extraordinary measures be taken by central banks and governments globally, with unprecedented and coordinated action not seen since the 2008 financial crisis. Monetary policy loosening was also extensive in 2019 with a total of 71 rate cuts by 49 Central Banks, according to the IMF. 

So, it’s understandable that a Treasurer or Finance Director may feel identifying new counterparties and opening deposit accounts is an onerous and futile exercise, one that for many is a daunting task often bypassed due to the perception that the benefit doesn’t warrant the effort.

There has also been a stigma associated with the industry which has meant treasuries have largely felt they have had very few trusted options available to them to navigate through these prolonged times of uncertainty and minimise their exposure to risk, or not been allowed to use such a service because of their investment policy.

Over the last decade we have also seen a significant increase in the number of banks in the UK. Currently, there are 345 deposit-taking banks’. Many of us may immediately think of the increase of recognised challenger banks, such as Metro Bank, but actually there are many less well-known possibilities giving rise to additional considerations beyond just credit rating to consider – such as the capital and liquidity of the bank. Many of these banks are UK branches and subsidiaries of larger overseas banks but, with only one of the largest 10 global banks in the world (by assets) being based in the UK, there are additional factors to consider – such as sovereignty and the level of risk in the investment and loan activities the bank undertakes.

With only a handful of these names appearing accessible and others not making their rates, products or even appetite for cash known, the range of rates for a depositor continue to remain limited relative to the wider market. This has led to cash managers compromising on their ‘ideal’ treasury policies in a need to diversify counterparty risk”

In a world and revolution driven by technology and the change in regulation, access to liquidity is now once again democratised.

Bobby Jackson, Managing Director of FXD Capital said: “Depositors of all size and sophistication can now have access to the same opportunities that the largest, most knowledgeable cash managers have come to expect - good quality counterparties who have appetite to raise liabilities and are offering a good return. For a depositor to understand what their deposit rate should be, they must first obtain rates from comparable counterparties for the same duration. Only then can they truly understand their opportunity cost of using banks offering inferior rates and that could also be higher credit risk”.

Yet, the key challenges for a depositor are clear and at times overwhelming. Risk assessing the current banks beyond standard credit ratings, which are updated periodically and often do not address the near-term risks. Devising a robust investment mandate, continually monitoring existing and new bank names, identifying new banks, opening deposit accounts and negotiating competitive rates all pose a challenge and increase bureaucracy for organisations tasked with managing cash.

We’ve been exploring what should make an ‘effective’ money broker and summarised some of the salient benefits to a treasurer using such a service:

Firstly, money brokers are remunerated by the banks therefore there should never be a cost to the depositor for their service. This service done right means all parties should be motivated and rewarded to develop meaningful long-term relationships. One where all parties benefit leading to optimum solutions on all sides.

An effective money broker should have depth and breadth of market knowledge and always put the client, and not profit first. Showing the right deals aren’t always going to be the most profitable for the broker. It’s got to be transparent.

The depositor always deals directly with the bank and achieves rates comparable, if not better than what they would have received should they have gone direct.

An effective money broker should be considered an extension of your treasury team - your ‘eyes and ears’ in the market. Therefore by knowing your key criteria they don’t waste your time, only showing you the most relevant and considered solutions in line with this – your counterparty, cash and liquidity requirements.

They should be helping you to proactively manage your counterparties, whether the relationship was brokered by them or not, keeping you abreast of what’s happening in the market – such as credit rating changes and changes in appetite for funding, as well as monetary policy action.

In summary. By utilising the correct deposit products with carefully matched counterparties, any organisation will be able to achieve better returns while not compromising on, and perhaps even enhancing, the liquidity or credit quality of the counterparty they are placing funds with.

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Author: Bobby Jackson, Managing Director - FXD Capital

Website: www.fxdcapital.com