Small funds struggle to find big backers

It has been a complaint since the financial crisis that the big banks no longer want to deal with small businesses.

Anecdotes abound of firms turned away by the likes of Bank of America and JPMorgan Chase, turning instead to regional banks, community lenders or online platforms like OnDeck or Kabbage.

But something similar is happening in institutional markets. The smaller the fund, the less likely that big banks will want to bother.

Consider the case of Citibank vs Tormar Associates LLC, a two-man family office based in Stamford, Connecticut. Until a few months ago, Tormar was a client of Citi's FX Prime unit - a business within the bank which acts like a concierge to hedge funds, supplying them with everything from loans and research to introductions to investors.

Tormar was also one of the many firms on the wrong side of currency trades on January 15, when the Swiss National Bank stunned investors by removing the cap on the franc, causing it to soar almost 40 per cent against the euro and the dollar in a matter of minutes.

When asked by Citi to come up with more cash to back its bearish bets on the franc, Tormar refused, arguing that the violent moves were a temporary dislocation, and that Citi had no right to make that demand. Citi then took over the positions and unwound them at steep losses - an act that Tormar claimed was violating the terms of its service agreements.

Citi sued for $25m plus interest about two months later, accusing Tormar of "clear-cut breaches" of its contractual obligations. Last week Tormar counter-sued, accusing Citi of "panicked" and "improper" conduct. It claims to have been quoted prices much better than the ones Citi achieved on its behalf.

Citi has yet to formally respond to the countersuit, but told the FT that it stood by its original complaint and the allegations in it.

But setting aside what actually happened when tempers frayed, the reality is that a prime broker is suing a client. And that very rarely happens. Especially not after - as Tormar tells it - six years of a very fruitful relationship.

"It is truly David versus Goliath," says Ron Marks, one of the pair. "We are two guys and an assistant, sitting here wondering why they came after us."

"This was an enormous market event and lots of people lost lots of money," adds John Tormondsen, the other. "But we can't find anyone else subject to legal action. It doesn't pass the smell test."

Some context probably helps. Costs are rising in FX prime, as well as in broader prime brokerage, while banks remain under pressure to boost overall returns for shareholders. Capital standards are getting tougher too - especially for the biggest, most globally significant banks. By cutting smaller funds loose, banks can focus on those that can produce the steadiest income after tying up the least amount of capital.

Some of that attrition is coming from jacking up prices. Trading $1m of currencies at a big prime broker now costs about $1.25, rather than $1, according to market insiders. Big brokers have pushed up margin requirements too. If funds were asked to put up 3 to 5 per cent before, now it is more like 6 to 10 per cent.

"If you're in a position where your returns have to go up, you might reach the conclusion to focus on revenue-intensive clients," says Adam Schneider, a consultant at Deloitte. "A lot of the small guys are like fruit flies - they last 24 hours and they die."

Small funds may have other places to go. Some have turned to midsized banks that are not subject to the highest regulatory and capital requirements. Others are using so-called "prime-of-prime" brokerages like FC Stone and GTX, which stand between funds and a credit-supplying broker, using their own balance sheets to take the first loss.

But the cutbacks - and perhaps the lawsuit - are further evidence that after the financial crisis, the big banks would rather surround themselves with the biggest clients.

On Main Street and on Wall Street, it appears the little guys matter less and less.

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