(Corrects paragraphs 5 and 6 and adds paragraphs 7 and 8 to
specify that revenues referred to include equity trading and are
percentages of total revenues from investment banking alone, and
to detail FICC share of overall trading revenue)
By Jamie McGeever
LONDON May 11 The boom years of financial
market trading, when banks made unprecedented profits from
bonds, currencies and commodities, may be over for good as
financial firms realise there will be no cyclical upswing on
their dealing desks.
Even though it's taken Western economies several years to
regain pre-crisis national output levels, many doubt banks will
ever revisit the pre-crisis high watermark of their trading
Revenues from fixed income, currencies and commodities - the
so-called 'FICC' universe - continued to tumble for most major
U.S. and European banks during the first quarter of 2014,
increasing the pressure on them to rethink business models.
Thanks to a more stringent regulatory environment and a
potential turning point in the 20-year cycle of falling global
interest rates, the twin peaks of just before and after the 2008
global financial crisis look unlikely to be revisited.
Revenue from FICC amd equity trading, which critics
sometimes dub "casino banking" and distinguish from traditional
investment banking services like underwriting share issues or
arranging mergers and acquisitions, still accounts for over 70
percent of banks' overall income from investment banking,
according to research by Freeman Consulting.
FICC and equity trading income at Goldman Sachs last
year was 72 percent of the bank's overall revenue from
investment banking, compared with 82 percent in 2010. Morgan
Stanley's FICC and equity trading revenue was 70 percent
of its total investment banking revenue, well down from 82
percent in 2003.
The FICC share of these trading revenues is shrinking. In
2007 around 70 percent of Goldman's $22.89 billion overall
trading revenue came from FICC. Last year, barely half its
$15.72 billion of such revenue was from FICC, according to
In 2006 FICC income accounted for just over 60 percent of
Morgan Stanley's $15.9 billion overall trading revenue, compared
to just 35 percent of the $10.1 billion pie last year, the
As new regulation bites and extraordinary monetary and
economic policies smother extreme market swings, the trading
volumes and price volatility that middlemen banking traders
thrive off has ebbed.
And it looks like a structural shift rather than a cyclical
or temporary lull.
"The revenues have gone. The world has changed from 2007,
2008," said Grant Peterkin, head of absolute bond returns at
Lombard Odier in Geneva.
"The regulatory aspect is the biggest aspect."
Regulation after the 2007-08 crisis such as 'Dodd-Frank' and
'Volcker Rule' legislation in the United States and Basel III
banking reforms globally, effectively restrict banks' ability to
hold, trade and speculate on fixed income and derivatives.
This reduces liquidity, but other traditional liquidity
providers like hedge funds have been unable to fill the gap
because their businesses are also under pressure.
IN A FICC
The pressure on banks' FICC operations was brought into
sharp focus by the broad-based slump in first-quarter earnings.
British bank Barclays grabbed the headlines,
posting a 41 percent plunge in trading revenue compared with the
same period in 2013, then announcing 7,000 of its 26,000
investment banking jobs will be cut.
"Some of the pressures we saw on the business towards the
end of last year are clearly structural as well as cyclical,"
Barclays Chief Executive Antony Jenkins told CNBC on Thursday.
Other bank chief executives are likely to follow Jenkins in
terms of direction if not magnitude, and reduce the size of
their FICC trading desk operations, analysts say.
They are expected to continue cutting costs, trimming
headcount, and in some cases, exit particular markets.
UBS is withdrawing from parts of fixed income
trading while Barclays has consolidated its G10 currency,
emerging market foreign exchange and precious metals trading
Elsewhere, JP Morgan Chase is selling its physical
commodities business and Deutsche Bank is closing its
oil, grains and industrial metals business.
Although Barclays' results may be an outlier and contrast
with other extremes, such as the 35 percent increase in trading
revenues at the likes of Morgan Stanley, the average
decline in FICC revenue from 10 major U.S. and European banks in
the first quarter was 14 percent.
That ongoing funk was all the more alarming as the first
quarter is traditionally the most profitable for FICC trading,
as pension and insurance funds open fresh investment positions
for the year and companies and governments sell new bonds in an
annual refunding splurge.
The 10 banks showed FICC revenues totaled $24.18 billion in
the first quarter, down from just over $28 billion a year
earlier and almost $30 billion for the same period in 2012.
The 10 are: Barclays, U.S. banks JP Morgan, Morgan Stanley,
Goldman Sachs, Bank of America, Citi, and European
firms UBS, Deutsch, BNP Paribas and Credit Suisse
The collapse in market volatility has also contributed to
the decline. This may be a relief for risk-averse investors but
it also makes them less likely to use market hedging instruments
sold by the banks.
It also reduces the arbitrage opportunities that nimble
banks and brokers feed off for in-house trading profits.
Implied volatility, which measures the potential for asset
price swings over a specific period, is at or close to record
lows in deeply liquid and highly-traded assets like U.S.
Treasuries, euro/dollar and dollar/yen
Analysts also say the whiff of scandal resulting from global
investigations into alleged rigging of benchmark foreign
exchange rates and Libor interest rates is clouding the FICC
environment, and forcing banks to set aside billions of dollars
for potential litigation costs.
The final nail in the FICC coffin, analysts say, is that the
world on the cusp of rising interest rate cycle, led by the U.S.
Federal Reserve's reduction - or "tapering" - of its
extraordinary post-crisis stimulus.
It's completely uncharted territory for banks and traders,
and not conducive to making easy money.
"We've had the most enormous change," said Chris Wheeler,
banking analyst at Mediobanca in London. "And there's more to
come as the full impact of tapering is felt."
(Editing by Sophie Hares)