For signs of where the action is in the $7.5 trillion-a-day currency trading market, look no further than Apple’s balance sheet.
The technology company is sitting on $135 billion in foreign exchange derivatives, some of which are used to hedge against currency fluctuations across its many markets.
Alphabet has about another $60 billion of these contracts. In comparison, the world’s currency-focused hedge funds manage $78 billion – combined.
The scale of the numbers capture the huge shift that has taken place in the market in recent years. These days, Wall Street’s biggest banks are increasingly asking their currency traders to cater to the largest companies on the planet in their hunt for more stable, recurring fees.
In one sense, it can be seen as the world of forex going dull. Out are the arm-waving, rowdy traders who spend their days exchanging banter and shouting bids in slang. Instead, enter the new titans: smooth-talking corporate bankers who have the ear of treasurers and corporate finance chiefs the world over.
And those bankers are delivering. Companies have become the bread and butter of currency divisions, bringing not only consistent business but fatter margins.
Revenue in corporate currency business at the world’s five biggest banks has jumped about 30 per cent in the past five years, according to data firm Vali Analytics. For the top 50 banks, it now accounts on average for more than half of all currency revenue.
“The FX industry has become super commoditised and competitive,” said Angad Chhatwal, head of global macro markets at Coalition Greenwich, a provider of financial data and analysis.
“The banks have to find some sort of advantage.”
The change is partly related to new regulations that forced lenders to cut back on their currency trading offerings for the world’s largest asset managers in the aftermath of the global financial crisis.
The other driving force has been the decline in currency volatility. That crucial juice for the market waned during the period of ultra-low interest rates and quantitative easing, and many investors quit the market. The number of FX-focused hedge funds has dwindled 82 per cent from its all-time high in 2007.
When the biggest US banks begin to report third-quarter earnings on Friday, Wall Street giants like Goldman Sachs Group and Morgan Stanley are expected to post steep drops in revenue tied to the business of trading fixed-income, currencies and commodities products.
Meanwhile, Bank of America and Citigroup, which have long focused on providing FX services to the world’s biggest corporations, are expected to post small increases in such revenue.
Citigroup in particular has thrived in this new world, clinching the top spot in currency trading market share for 10 straight years, according to a ranking by Coalition Greenwich.
And when executives were hunting for a new leader for the business earlier this year, the banking giant turned to Flavio Figueiredo, a 34-year veteran who most recently led the corporate sales efforts within the FX division.
Under chief executive Jane Fraser, the firm has been doubling down on its corporate currency offering, leaning into its physical presence in more than 60 countries.
That gives it direct lines not only into corporate treasurers sitting in companies’ headquarters in the US, but their subordinates around the world who have to triage their cash balances in foreign currencies on a daily basis.
“That’s definitely our edge,” said Lynley Ashby, Citigroup’s global head of FX business strategy. “Having people on the ground has given us those touch points not just with central treasuries but also the subsidiaries.”
At Deutsche Bank, home to one of the world’s largest currency-trading desks, the corporate opportunities are part of the reason it believes it can still achieve its financial targets despite an industry slump in trading revenue that stung the German banking giant and its rivals in the first six months of the year.
“There is a whole chunk of revenues that are generated by steady relationships in the corporate bank for underlying real-economy business that needs to be hedged and supported, which are once again less volatile in nature,” Fabrizio Campelli, who oversees Deutsche Bank’s corporate and investment banking unit, told investors last month.
If the new world of currency trading looks more staid, it has not quite killed off its legacy of controversy.
Deutsche Bank and Goldman Sachs have both faced criticism and scrutiny over sales practices tied to the way they pitched currency offerings to companies. Some clients argued bankers sold them complicated products that they did not understand.
The shift to focus on corporate sales has taken on new impetus this year as currency trading desks battle a slump in market volatility that crimped industry-wide revenue by 15 per cent in the first half.
The decline partly reflects the fact that 2022 was an outlier, when central bank interest rate increases and Russia’s invasion of Ukraine heightened volatility.
“Volumes are down,” said Carlos Fernandez-Aller, global head of FX and EM macro trading at Bank of America. “People are not as keen to trade FX this year.”
But whatever the market and economic cycles, companies typically have mandates to hedge a certain portion of their currency exposure.
That is creating a cushion for bank trading desks as their old business has slowly dwindled. This year, systematic orders from corporate clients have remained resilient despite the broader pullback from FX markets.
Take Apple: its derivative book has more than tripled from the portfolio it maintained a decade ago.
“It’s the right approach for the company in terms of minimising the volatility that necessarily happens from the movements of currencies,” Apple chief financial officer Luca Maestri told analysts in August.
“It’s a very large and, I would say, very effective hedging programme.”
The inception of electronic trading has also changed the landscape, making it more difficult for banks to cling on to business from fund managers.
The rise of multi-dealer platforms has given asset managers the ability to shop around and compare prices from several banks, while newer FinTech platforms have slashed the cost of trading and stolen market share.
Still, it is not only the consistency of the orders, regardless of market backdrop, that makes growing corporate client share attractive. Banks can typically reap a higher margin, too.
Since corporate clients often rely on their bank for several services like borrowing, debt issuance or advisory, the relative benefit of shopping around for cheaper FX pricing is smaller. On top of that, firms often have treasury policies that only permit the use of certain banks.
“It’s not always about who has the cheapest price,” said Naresh Aggarwal, an associate director at the Association of Corporate Treasurers.
Instead, it is “who’s going to give me the best overall service”.