Banking and finance is one of the most sophisticated sectors of the Russian economy. Amongst the emerging markets, Russia is the only large economy to run a totally open current account: an investor can send dollars to Moscow to buy shares on Monday and take their profits out again on Wednesday without restriction.
However, despite the liberal regime, Russia remains an emerging market and there are still quirks and regulations that restrict the completely free flow of capital. The modernisation and global integration of the core markets infrastructure was a huge step forward, but Russia’s leading broker dealer BCS Global Markets has just launched a new Portfolio Swap product that provides universal access to the Russian capital markets through an OTC instrument that irons out many of these quirks and makes trading in Russia easier and cheaper
“We have launched a synthetic prime brokerage business in the form of a Portfolio Swap product on a fully integrated platform. It allows clients, whether hedge funds or investment banks, access to Russia, across asset classes, on swap basis,” Tim Bevan CEO of BCS GM Prime Brokerage told bne IntelliNews in an exclusive interview.
In addition to making it easier for international investors to execute Russian trading strategies, BCS GM has greater ambitions. Although it is starting with Russian markets, the broker is also targeting small and medium sized hedge funds that are being ignored by the world’s leading prime brokers and use the new synthetic product as an instrument to provide access to international markets. BCS was recently admitted to the floor of the New York Stock Exchange, a first for a brokerage with Russian roots, and has tied up with Tigress Partners in New York to better access US based clients and offer them bespoke brokerage services in markets other than Russia.
A synthetic PB platform is a combination of some sophisticated and fully integrated software along with BCS GM’s ability to take some of the elements that go into a trade onto its own books for the purposes of hedging.
“The great advantage is its convenience. Everything is written on a swap basis. Whatever assets or markets you trade, everything is calculated into the swap, with almost infinite flexibility to the associated Reset or Event Calendars,” says Bevan. “It is an incredibly efficient way of offering global prime brokerage to clients. If you have a scalable and flexible product platform, then clients can actively trade and manage their portfolio on a contractual settlement basis, receiving streamlined reporting and simple cash settlement upon Reset. The economics follow exactly as with owning the underlying asset/position, leveraged or unleveraged, but without the administrative burdens associated with holding a physical portfolio, or needing to hedge-out various economic components independently.”
For example, US domiciled institutions cannot trade Moscow Exchange futures as they are covered by the regulator, the US Commodity Futures Trading Commission (CFTC). Russia’s dollar denominated Russia Trading System (RTS) futures are priced in dollars but “variation margin” — the money earned on the trade — is settled in rubles. While the ruble is a fully exchangeable currency and has a deep and liquid market, most US based hedge funds that might be interested in trading Russian strategies are simply not set up to trade rubles and smaller funds are not interested in either the FX risk or building the expensive and complicated infrastructure to do this sort of currency trading. BCS’s synthetic product takes all these problems away. The swap is US dollar denominated, in terms of variation margin and commissions.
“Trading Russian futures is difficult from a regulatory, settlement and hedging perspective. We can now provide access to any professional investment vehicle globally,” says Bevan.
In some respects this is like a mirror trade, which caused Deutsche Bank trouble last year and ended in a big multimillion dollar fine. However, Bevan emphasises, whilst the product overcomes certain regulatory, operational and hedging challenges, BCS remains fully compliant as an FCA regulated European broker, does not offer access via the product to sanctioned assets, and complies fully with restrictions imposed on Russia by Brussels and Washington.
“We wouldn’t touch anything that was sanctioned,” says Bevan.
The beauty of the product, which Bevan claims is the most sophisticated available, is that it can be used to execute any type of trading strategy. He gives another example of an international hedge fund that wants to trade a long/short strategy for Russian shares.
“Say you want to trade a pair like long Russians state-owned oil major Rosneft, but short the gas monopolist Gazprom, then we can simply write swap contracts for these positions, that pays out its P&L in USD daily, weekly, monthly or whenever you want. We take the assets onto our books and the client just collects the profits upon Reset,” says Bevan, who has been building up the prime brokerage business to facilitate exposure to equities, fixed income, derivatives and the full range of products that are offered by all the best providers.
BCS GM built up its business in Russia catering to corporates and high net worth clients that wanted sophisticated banking services, but after the business reached critical mass, it has diversified internationally. BCS GM already has large offices in London and New York and now it is targeting small and medium sized funds in those regions by offering niche products to its clients.
BCS GM’s strategy is reminiscent of how many of Russia’s leading banks developed in the noughties. Having captured some solid core business, like servicing the payroll of a giant state-owned company, the banks used this income to build out the whole spectrum of banking services like credit cards, autoloans and mortgages that became ever more sophisticated as they introduced moneymaking businesses like securitisation of credit card receipts or derivative products.
What makes BCS unique is it is taking its strength in execution and has started to market its services internationally, offering non-Russian bespoke services to its clients, and as such is the first bank to attempt to build a traditional global banking service that is diversifying out from Russian markets.
“We started with Russian assets, but we intend to offer international multi-asset products. We offer US today and will offer Europe shortly. We will offer on exchange derivatives and fixed income instruments via swap, in addition to equities. We are targeting small and medium sized hedge funds with any global trading strategy — whatever their niche: global macro, long/short, event driven, etc — and give them global execution and portfolio management capabilities through the platform. We believe there is a massive opportunity in the sector for a multi-asset class, versatile service provider, offering an enhanced level of customer service, to small/medium hedge funds who suffer from being second-class clients to the Tier 1 community,” says Bevan.
Following the 2008 crisis many of the big international prime brokerages began cutting their smaller clients to reduce risk. That has left a hole in the market as, unless a fund has several hundred million dollars under management, the big boys won’t deal with them. BCS GM is targeting these under-served funds and by gathering their business together can get the size of its deals up to a level where it can do business with the leading global prime brokerages in the international markets.
“I’m an aggregator,” says Bevan. “Synthetic prime brokerage is faster growing than physical prime brokerage, which has a lot more complexity in terms of infrastructure set up. The synthetic product is much more scalable and much more efficient in terms of the way it is offered. There is a gap we are going to occupy in the market. The big tier 1s are dealing with the big players but ignoring the smaller funds, and the smaller PBs lack product and breadth. This is BCSs strategy in general.”
BCS GM has been offering prime brokerage services since 2013 but Bevan says its business has now reached critical mass and it is of a size to step into this hole in the middle of the market.
“We are the right size. We have the right amount of capital to be big enough with a superior credit profile to current operators in this space. But not big enough to compete with the tier one banks,” says Bevan. “And we have the right background. BCS has been offering specialist Russian prime brokerage since we started in 2013. Because Russian isn’t offered by the major primes we deal with some of the most sophisticated clients in the world looking to trade Russian strategies.”
“BCS now differentiates itself by product strength, breadth and versatility, along with an enhanced level of client service — we will continue to remain innovative and evolve in alignment to client needs” says Bevan.
The core infrastructure — the risk layer, the technology layer, the client support layer — is already in place. And by putting the swap product in place and establishing the “mini-prime model”, where BCS GM aggregates the business of lots of small and medium funds, BCS GM thinks it has a scalable model it can build up into a major international business.
The new synthetic product already has a number of major institutional clients and Bevan says when the product is fully rolled out by the end of the year there will be half a dozen more, who are in talks at the moment.
“There is a broad range of clients keen to on-board; hedge funds, proprietary trading firms, investment banks and other sophisticated brokers.”
Bevan expects the business to grow rapidly over the next year and to go to a billion of gross position in the first six to 12 months.
Initially BCS GM has started with offering Russian synthetic swaps as that is what it is best known for and where it continues to be able to offer a unique service. But as time passes the other products will quickly be added.
And there is an interest in Russian trades despite the international geopolitical climate. These very problems have created a volatility that is attractive to traders, if not long-term direct investors.