The regulatory reforms of Dodd Frank, MiFID II, EMIR and Basel III, are fundamentally changing the structure of Global OTC markets. As a result, participants face higher costs for regulatory capital, mandatory trading of standardised derivatives, increased pre-trade transparency and post-trade reporting and a drive to central clearing.
On top of which banks have been hit with multi-billion dollar fines for manipulation of LIBOR rate fixings, and market collusion around FX manipulation.
As a consequence, banks are re-engineering their businesses, shifting from capital intense (balance sheet consuming) activities to ‘capital light’ business models, driving down costs by moving from voice to electronic execution, from bilateral to cleared and from principal to agency – capital efficiency, low risk, client servicing is the name of the game.
Whilst challenging traditional business models, the regulatory reforms have also created opportunities for innovative new trading platforms, regulatory compliant market infrastructure, and services that facilitate the ‘capital-light’ business models.
Inter-Dealer Brokers (IDBs), the middle men matching buyers and sellers in the OTC markets, have been quick to spot opportunities to re-invent themselves, and invest in new technology solutions that will enable them to remain at the centre of execution in the new market order.
ICAP, the biggest of the IDBs, gave a glimpse under the hood of these changes in their full year results which were released yesterday, and although overall revenues are down 7%, they make fascinating reading in the trends that they reflect, and the speed by which IDBs are re-positioning the business to benefit from the changes in market structures and drive to market efficiency.
- Overall revenues down 7%
- Electronic Markets & Post Trade services account for 75% of profits (70% prev)
- Post-Trade revenues up 8% driven by Tri-Optima and Traiana
- Merger of FX (EBS) and Rates (BrokerTec) into a single offering (accounting for 64% of group revenues) took six months: EBSBrokertec
- Electronic markets revenue split: EBS 48% (46%prev), Brokertec 49% (50% prev)
- Headcount changes: Global broking -24%, Electronic markets +12%, Post-Trade +10%
- Moving outside the traditional inter-dealer market, to service segments traditionally seen as customers (buy-side firms) such as hedge funds, asset managers, retail brokers
- Spend on new initiatives £43mln
- Including EBS Direct, EBS Select, eFIX, new HTML5 platforms,
Investment in new Products by ICAP
EBSDirect, the new relationship based FX platform from EBS has proved a huge success, as can be seen from the volume figures below:
EBSDirect Monthly Volumes
Interestingly, Tradition another major IDB, has also been exploring opportunities from new market structures, and recently announced the launch of a new electronic repo-market DBV-X to facilitate the efficient use of collateral.
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