SINGAPORE (Feb 28): IG Group, the UK-listed over-the-counter (OTC) leveraged derivatives provider, is well known for offering retail investors access to its famed contract for differences (CFDs) trading platform.
But there was a time when these derivative products were traditionally available only to institutional and accredited investors.
“It’s been an amazing story,” IG CEO June Yee Felix, who is based in London, tells The Edge Singapore in a recent interview. “IG took the innovation of wholesale markets and brought it to retail, [which] in some ways democratised financial markets. Its vision was to allow sophisticated, self-directed people to gain access to financial markets,” says Felix, who was in town to meet clients.
But amid the headwinds that have hounded the over-the-counter derivatives industry over the last few years, IG is now pursuing growth opportunities from institutional investors. In particular, it is targeting family offices and boutique hedge funds with assets under management of US$200 million ($278 million) and below.
According to Felix, many of these institutional investors are looking for cheaper options to trade. The traditional clutch of prime brokers, the likes of JP Morgan and Goldman Sachs, are too expensive for them in terms of service cost and overheads, she explains. Moreover, these brokers are geared up for much bigger clients, like those of the S&P 500 index, “which takes different skills and touch”, she adds.
Interestingly, IG was not even looking at this segment in the first place, Felix admits. Rather, it was representatives from these family offices and boutique hedge funds themselves who came knocking on the company’s door. Since many of them already had personal trading accounts with IG, why couldn’t the company provide its services too, but at an institutional level, they thought?
“They look at what they were getting from their prime brokers, and they were thinking [our] price is so much better and [that we] answer [their] calls. [So] why are we using [the services of] somebody else?” she says.
Therefore, IG put together a new team dedicated to serving this segment across the US, UK, Switzerland, Singapore, Hong Kong and Japan. The company also made some enhancements to its product offerings to tailor to their needs. “Being very client-focused, we want to make sure we can serve them,” she says. “The beauty is [that] we have the technology platform, people and expertise to serve that market well.”
Felix proudly says this particular segment has grown 30% in number of clients over the last six months. And there are more opportunities ahead, given that there 8,000 hedge funds of that size, she estimates. “So we think the institutional segment has real scope,” she says. “It is a GBP500 million ($904 million) opportunity for us. It is a nice segment that we have a high probability of winning.”
Does this mean that IG is pivoting away from its core retail base? Not at all, according to Felix. “We are expanding. It is like adding more legs to the stool. We are not going [for big] institutional investors. We are going for small hedge funds and family offices,” she says. “We are very clear about this segment because they have needs that are very close to our sophisticated and active traders, [and are not being met].”
In 2019, financial regulators and central banks around the world tightened rules for the trading of leveraged products. This was aimed at reducing the risk of poor conduct by firms and poor client outcomes. As a result, IG was directly impacted and growth has become more difficult to achieve.
One of them was the European Securities and Markets Authority (ESMA)’s regulatory framework which came into effect in the UK and the rest of the EU early last year. These measures restrict the marketing and sale of CFDs, and include leverage restrictions, loss protections and risk warnings. National authorities in most EU member states have confirmed they will introduce permanent measures that are similar to the ESMA measures. This includes the UK’s Financial Conduct Authority (FCA).
Down under, the Australian Securities and Investments Commission (ASIC) in August last year proposed a number of restrictions on CFDs. These include imposing leverage limits, enhancing transparency of pricing, execution, costs and risks, implementing negative balance protection and a standardised approach to automatic close-outs of client’s positions in margin call. IG says it expects that any measures ASIC chooses to implement will apply to retail clients only.
ASIC also asked all its licensed providers of CFDs to prevent Chinese nationals from trading through their platforms. It was a request from the Chinese State Administration of Foreign Exchange. As a result, IG lost GBP2.7 million in revenue generated from its Chinese resident clients in Australia.
In Singapore, leverage restrictions were tightened to 20:1 from 50:1 on foreign exchange (forex) derivative products for retail clients in October last year. The forex margin for accredited, expert and institutional investors will remain at 2%. IG, however, says this change is not expected to materially impact its revenue.
Regulation restrictions aside, the industry faces unyielding pressure to lower its trading fees. Brokerages such as Charles Schwab said it will end its commission per stock trade, exchange traded fund (ETF) and option trade of US$4.95. TD Ameritrade also said it will drop its commission of US$6.95. Moreover, E-Trade Financial Corp said it will stop its retail commissions.
Will IG follow suit and eliminate trading fees? Felix brushes it aside. IG’s commissions are already “competitive” and scale matters more. “We are the biggest in the sector. That’s why we feel confident that our core is strong. We are investment grade BBB- by Fitch Ratings. We believe that over time we have a reason to be upgraded as we diversify and add more products,” she says.
Since becoming its CEO in October 2018, Felix has reorganised IG’s existing businesses into two groups. The core markets segment consists of the UK, EU (CFDs), Australia, Singapore and non-EU European, Middle East and African countries. These are large and established markets in which the company already has a significant presence, with strong market shares, particularly amongst the highest-value traders.
The significant opportunities segment, on the other hand, represents geographies, clients and products where the companies currently have a presence. But IG recognises that this segment has potential to serve more clients and to deliver significant revenue growth ahead.
Felix also unveiled a new growth strategy for the company. In addition to family offices and boutique hedge funds, IG will expand its distribution channels through other partnerships, such as the private banks. “So what we have been able to do is provide them with new types of products that are very profitable. [These are] new revenue streams that we are willing to partner them on,” she says.
While IG has a global presence, it knows the importance of localising its products and services for different markets with relevant context and content. This was done in Japan, for instance. However, Felix notes that Singapore does not require much localisation as the local market resembles closely to Western markets.
The company is also constantly rolling out new products. For example, it launched a US margined forex business and options in Europe. It also developed a multilateral trading facility, Spectrum, to allow European clients to trade turbo warrants on a 24/5 basis.
Felix’s efforts appear to be bearing some fruit. For 1HFY2020 ended Nov 30, IG reported that the number of over-the-counter (OTC) leveraged active clients rose 4% y-o-y in the European Securities and Markets Authority region. Other core markets OTC leveraged active client numbers were up 5% y-o-y. In Singapore, the figure was up 7% y-o-y, according to Felix.
But this has yet to translate positively to IG’s top and bottom lines. During the half-year period, IG’s net trading revenue slipped 0.4% y-o-y to GBP249.9 million from GBP251.0 million previously. Earnings fell 9.8% y-o-y to GBP82.4 million from GBP91.4 million previously.
Still, shares of IG are up about 18% in the last 12 months. That could be a sign that investors are confident of Felix’s ability to steer the company ahead. Felix was previously president of Verifone Europe and Russia. Prior to that, she held various executive management positions at a number of large multinational businesses. These included Citibank, IBM and Chase Manhattan Bank.
Given her tertiary studies in chemical engineering, Felix could have embarked on a career in that field. But she realised that if she really wanted to make an impact, getting into management was the place to be. In fact, this go-getter attitude was also a byproduct of growing up as a Chinese American in a predominantly Caucasian society. “You do the best you can either at school or be ambitious [because] you don’t feel that anybody owes you anything,” she says.