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Small-Cap: Why size shouldn't inhibit function.


The growing chorus of fund managers lending weight to a belief that emerging market equities are the only ones able to deliver over a 4.5% return over the next decade means an increase in the demand for exotic currency settlement capabilities.


Taking examples of work done with boutique stock brokers whose clients need to clear USD for dollar denominated investments, we take a look at those currencies that are already ready for open market proliferation, those that aren't and how you can make use of existing structures to maximise your FX position.

The first thing to say is that we won't be venturing our thoughts on which currencies will appreciate or devalue over the next 10 years.

What we will be doing is explaining some of the obstacles you already face when trying to settle exotic or even ND currencies and discussing the common treatments for matters that rely on as yet undeveloped domestic financial and banking systems in emerging markets, particularly those with existing currency controls.

 

At present the vast majority of retail and professional investors, no matter where around the world they are located, rely on banks, third party brokers/intermediaries or prime brokers to handle the currency concern associated with investing in an asset class denominated in a currency other than their core operating tender.

Professional and institutional investors are not our focus. Their FX turnover means they will achieve similar rates to those we buy at.

Our focus are those retail investors or micro-funds holding positions, maybe large or maybe small, in other currencies and whose own proprietary FX activity does not permit them access to the same rate competition as a currency broker like us.

These are where we can positively impact and undercut on margin and provide a clearer and more efficient payment processing mechanism.

 

Niche brokers in small-cap non-GBP denominated stocks handle significant foreign exchange traffic.

Whether they realise it or not, leaving their client to settle purchases directly with a clearing house put the client on the back foot both in terms of their FX exposure for the position and in terms of added expense when an exchange is required.


It could not be simpler for a private client or professional investor to avail themselves of either a dedicated foreign currency account with their bankers, or to begin transacting and exchanging through a dedicated FX broker like Prime Cap.

 

Currency controls can make certain investment territories risky or uncertain in terms of clearing times and settlement currency, but, increasingly investors can settle in USD.

Given that USD is such a common currency for such settlements, the exchange and spread between GBP and USD (Cable) is often overlooked one deserving of a closer look or benefiting from a pricing exercise.

On the one hand, we find ourselves increasingly attractive to private clients called on to settle in USD for their capital markets activity, and, on the other, we have seen a distinct increase in the number of intermediaries incorporating our white-label FX platform capabilities in to their service offering to clients.

 

As a simple example:

Our private client invested in certain USD denominated assets over 18 months ago.


Prior to our involvement dividends and coupons, or simply USD following liquidation of any part of his portfolio in fact, would come back to his singular GBP brokerage account.

On realising he was at liberty to take receipt of funds through a personally source solution he began providing our USD client account details as the collection beneficiary for these monies.

The first thing we had feedback on was his appreciation of the automated alerts that tell him USD have arrived with us.

These funds are then immediately applied to his USD balance facility with us.

Each time he logs in in to our online system he can see the USD accruing.

It is then his choice whether to pay away from that balance as USD for another purchase, or for any other payment reason including sundry USD expenses for his Florida condo, or, he can flip USD directly in to GBP through the system.

The GBP he might buy sits on his GBP balance within the facility until he inputs the GBP bank details he wishes it to be paid to.

Sure, our brokers are on hand to talk him through the USD to GBP rate or to place an order to be worked through the market, but, he does not need us.

Furthermore, his equities broker has now inserted links to Prime Cap on their site so that other would-be DIY USD sellers and buyers can register directly.

In this instance, whilst we are on hand to guide and advise, we are simply the execution platform for this particular client and his bespoke requirements.

The level traffic put through our systems keeps us busy and we are always at the end of the phone to aid and assist.

 

The limitations of currency controls notwithstanding, as emerging markets ramp up their courtship of niche brokers in their wears we will see the ability to clear directly in to their domestic banking structures improve and grow.


At the moment conditions relating to the ownership of property and applications to operate within territories are stifling the broader proliferation of alternative and direct investment initiatives, but, light is beginning to work it's way through the clouds.

The recent changes to the inter-bank treatment of Nigerian Naira serves as a positive reminder that, whilst the western economies wrestle with ever more extreme ideological divisions, the effect of an uptick in global economic fortunes should see eggs being taken form certain emerging markets baskets and spread more widely in to as yet untapped domains.

Changes to the Common Wealth structure and what we hope will be increased openness post 2020/21 for the UK means that previously overlooked operators should gain more airtime.

 

Simple things like the ability to check and verify beneficiary bank details before the release of a payment will serve to ensure that fewer errors are made when sending funds to ever more exotic locations.

In instances where funds can not be directly extracted in local currency from countries like Brazil or countries in Central Africa, we find ourselves more assured in what information to ask for so we can receive third party USD funds in..

Local settlement networks are ever increasing in their breadth and sophistication. This brings with it new avenues for institutions to credit locally.

Day traders and retail investors alike can swiftly and simply register for the Prime Cap online trading system and position it along side their existing execution platforms for a truly integrated experience.

The Prime Cap Data Centre is packed with case studies on usage and treatments for certain transaction activities and we invite each would be client to discuss the finer points of their activities with our team over the telephone.

Our bottom line is that size should not inhibit function.

Just because for portfolio is denominated in a different currency does not mean that you should be limited in the services and tools available to you.

Prime Cap's spreads are as close to institutional as a retail operator can hope to get so why, when you wouldn't settle for anything less than the most precise and real-time reporting and pricing tools, would you sell yourself short on your clearing capabilities and FX spreads?

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