The curse of regulation has struck today. In strike one, the Financial Times reported today that Morgan Stanley wants to sell a majority stake in its commodities business to the Qatar Investment Authority (although this deal may have hit a snag). The sale is apparently being motivated by the Volcker Rule, which prevents bank holding companies from undertaking commodity prop trading and could make life difficult for Morgan Stanley – which has built up a strong physical trading business. The Federal Reserve is said to be considering whether to exclude banks’ physical trading businesses from the restriction, but Morgan Stanley appears to be acting pre-emptively.
In the circumstances, the question is obviously, what about Goldman Sachs and what about JPMorgan? Together with Morgan Stanley, they dominate physical prop trading on Wall Street. If Morgan Stanley is selling its business, surely Goldman and JPM should be too? There’s no indication that jobs will go in the event that the businesses are divested, but the future looks a little uncertain.
In the second regulatory strike, the European Union’s proposed Liikanen ring-fencing rule could turn out to be bad news for European investment banks with capital-intensive fixed income trading businesses. Although the ring-fence is permeable, JPMorgan analysts say it will compel banks to create standalone trading entities. These entities will need to have separate ring-fenced capital, to have separate funding, and to meet some regulatory capital requirements on a standalone basis.
JPMorgan’s analysts say the Liikanen ring-fence would require European banks to separate off all prop trading and all assets or derivative positions incurred in the process of market making. They would also need to separate off any loans, loan commitments or unsecured credit exposures to hedge funds and SIVs, and they’d need to separate off their private equity investments. All would require separate (and more expensive) funding.
The good news is that the Liikanen ring-fence would have exemptions. The use of derivatives for a bank’s own asset liability management purposes and for liquidity management and the provision of hedging services such as FX swaps and options would be exempt from the ring-fence.
Under the Liikanen proposals, simple corporate hedging services will therefore be able to go ahead at the current cost of funding. However, separating off all derivative positions incurred in the process of market making and requiring them to be separately capitalised, implies that European banks will have to set even more capital against their fixed income trading businesses. Both SocGen and BNP Paribas have built up their fixed income businesses in recent years. Both may be cutting them back heavily in future. And what about Deutsche Bank, which recently declared its intention of standing fast in fixed income until rival banks drop out? It may need to rethink.
Delusional European banks persist in trying to break into the US: “There is no chance.” (FT)
Marex Spectron, the trading supergroup, has increased its staff numbers from 180 to 600 over the past 2.5 years. (Financial News)
There are two subtly different narratives relating to Ina Drew’s downfall. (Seeking Alpha)
JPMorgan is creating a new SE Asian debt team and says it’s an ‘exciting growth area.’ (WSJ)
Did Kweku Adoboli and his colleagues have a secret meeting to decide who should take the blame? (Bloomberg)
Liquidnet, a provider of buyside trading platforms, has made 7 out of its 45 people redundant. (Financial News)
Private spread betting was very common at UBS. (FT)
Following the success of the ‘Teach First’ programme for top graduates (who can’t get jobs), the UK government is introducing a new ‘Frontline’ programme for top graduates to spend some time in social work. (The Times)
Labour will introduce new laws against dishonest bankers. (Guardian)