New regulations will wipe out $17 billion in trading revenue for global investment banks and force some to exit the bond trading business entirely

New rules to wipe out $17 billion in bank trading revenue: report

11:53am EDT

By Lauren Tara LaCapra

NEW YORK (Reuters) – New regulations will wipe out $17 billion in trading revenue for global investment banks and force some to exit the bond trading business entirely, according to a Deutsche Bank report released on Monday. New rules being implemented in Europe and the United States will push bond and derivatives trading onto exchanges as soon as this summer, which is expected to reduce the income banks make from trading with clients. Regulations are also boosting capital requirements for banks, as well as margin and collateral requirements for clients. That raises the cost of doing business and may lead clients to trade less, Deutsche Bank analysts said in the report. Their estimate of $17 billion in lost trading revenue represents 9 percent of sales and trading revenue for global investment banks in 2012.”We think that the long-run result of these changes will be a wave of industry exits from fixed income, currency and commodities sales and trading by second-tier players,” the analysts said. “For the purposes of this report, we view all banks with less than a 6 percent market share as ‘at risk’ of exit from full-service fixed income, currency and commodities sales and trading.”Banks with more than 6 percent market share include JPMorgan Chase & Co (JPM.N: QuoteProfile,ResearchStock Buzz), Citigroup Inc (C.N: QuoteProfileResearchStock Buzz), Barclays Plc (BARC.L:QuoteProfileResearchStock Buzz), Bank of America Corp (BAC.N: QuoteProfileResearchStock Buzz) and Goldman Sachs Group Inc (GS.N: QuoteProfileResearchStock Buzz), the report said. Deutsche Bank AG (DBKGn.DE: QuoteProfileResearchStock Buzz) did not include itself in the rankings, but it is also a large player in fixed income, currency and commodities (FICC) trading.

The report indicated that many more banks will have to exit bond trading. HSBC Holdings Plc (HSBA.L: Quote,ProfileResearchStock Buzz), Royal Bank of Scotland Group Plc (RBS.L: QuoteProfileResearchStock Buzz), Credit Suisse Group AG (CSGN.VX: QuoteProfileResearchStock Buzz), BNP Paribas SA (BNPP.PA: QuoteProfileResearchStock Buzz), Morgan Stanley (MS.N: QuoteProfileResearchStock Buzz) and Societe Generale (SOGN.PA: QuoteProfileResearchStock Buzz) were listed as having market shares below 6 percent.

Speculation about the fate of bond-trading businesses at banks without substantial market share heated up in October, after UBS AG (UBSN.VX: QuoteProfileResearchStock Buzz) said it would exit FICC trading, cutting 10,000 jobs in the process.

But other second-tier players have said they intend to stay in that business. Morgan Stanley executives, for instance, have said that by reducing exposure to risky trading areas and increasing exposure to high-volume, low-cost areas like interest rates derivatives, the bank can stay in the business, despite skepticism from analysts.

“Instead of competing for business based on the size of one’s balance sheet, we’re really competing on our content, coverage and what we’ve done with technology,” Morgan Stanley Chief Financial Officer Ruth Porat said in an interview last week. “It changes the competitive dynamic, but I don’t think there is an inconsistency in some seeing headwinds in certain areas and us not seeing it.”

Deutsche Bank analysts said that because trading will get more expensive for clients and banks, higher volumes may not make up for narrower spreads. They expect rates trading to experience the biggest revenue decline – $10.4 billion, or 20 percent – due to new regulations. That accounts for nearly 60 percent of the total drop in trading revenue.

A Morgan Stanley spokesman declined further comment.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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