Newedge embarks on prime broking expansion drive

Agency brokerage Newedge plans to focus on prime brokerage now that it is solely owned by Société Générale and does not have to contend with competing shareholders.

After SG acquired the remaining 50% stake in Newedge that it did not already own from Crédit Agricole in May, it has worked on building up its prime broking and execution services, said Laurent Cunin, head of Asia Pacific for Newedge.

He told AsianInvestor that while Newedge would benefit from SG’s capabilities in equity, derivatives structuring and research, SG now had the missing piece of a fully-fledged investment bank – a prime broking business.

Newedge is now forming an equity financing joint venture with SG that will offer stock borrowing and lending, including for ETFs, and collateral management services, said Cunin. He expects it to be operational by the end of this summer.

“When we were owned by both SG and Crédit Agricole, we were less able to get access to complex solutions and bespoke products from our parents,” he added.

Through this additional capability, Cunin said he aims to expand Newedge’s clientele, which comprises commodity trading advisers and long/short equity and macro managers.

He also foresees more cross-selling opportunities with SG as Newedge will work more closely with the former’s equity, fixed income, FX and commodity divisions.

Newedge will continue to conduct prime broking under an agency model. Clients will be free to choose, for example, any broker/dealer as an over-the-counter (OTC) swap counterpart. The firm will step in post execution as the client’s clearing broker.

Further, Newedge can rely on SG’s balance sheet to provide financing, and cross-margining too if clients trade and clear multiple asset classes.

OTC clearing is only just starting in Asia. But David Escoffier, Newedge's global CEO, noted that long-only and hedge fund managers in the region are increasingly likely to cross-margin across different assets. “Because in a low-return environment, you cannot spend too much on your collateral. It’s helpful on a value-at-risk basis to net all your collateral.”

What’s more, he said clients were increasingly likely to see collateral transformation – transforming, for example, a fund manager’s small-cap stocks into government bonds. He pointed to an example where Newedge transformed Japanese equities into bonds for US asset managers.

Asian investors should be aware of the global need for collateral: that they can lend their assets to use as collateral to enhance returns, said Escoffier.

There are risks for an asset manager in lending out equities, he conceded – doing so creates fiduciary issues and credit risks. But he suggested the practice can provide up to 100 basis points of additional return on assets.

Building on Newedge's listed options and futures offerings, which have been its strength, another focus will be global execution services for equities.

The firm’s presence in 85 exchanges across Asia, North America and Europe will now complement SG's cash equities and derivatives execution capabilities in over 130 markets globally.

Though the sales teams from Newedge’s commodities, fixed income, FX and equities desks will join SG, Cunin said the firm’s agency model would not be affected.

In December 2012, Newedge underwent a global restructuring in which it made cuts to its 3,000-plus workforce, but Laurent said that further cuts were not needed and in fact he may hire more sales staff.

However, he says regulatory reforms, low interest rates and requirements for brokers to implement pre-trade risk controls in Hong Kong would continue to weigh on agency brokerages and squeeze their bottom line.

The Securities and Futures Commission in Hong Kong has placed additional obligations on brokers in monitoring the robustness of clients’ trading algorithms. Such regulatory oversight on electronic trading has cross-border impacts, which has meant that agency brokers must evolve to survive amid ever decreasing commission rates, he noted.

In November last year, SG announced its €275 million ($369 million) acquisition of the other half of Newedge from Credit Agricole. As part of the deal, SG sold 5% of its stake in Amundi to Credit Agricole for €337.5 million, boosting Credit Agricole’s stake to 25%.