New investment banking models: ‘capital-lite’, ‘agency’ and ‘client-clearing’


Regulation is driving change in capital market structure, and as highlighted in the future of investment banking, banks continue to move towards a ‘capital-lite’ business model, as they seek to ‘optimise’ use of and return on capital.

The introduction of mandatory trading and clearing for standardised swaps (SEFs in US and OTF and MTFs in Europe) has resulted in higher capital charges for OTC bilateral trades, and reduced the appetite of banks to warehouse and hold inventory which is moving more banks towards a ‘capital lite’ model.

This is the backdrop to the announcement that JP Morgan the setting up a 150 strong fixed income agency execution desk called JP Morgan Execution Services (JPMES), to run alongside its principal trading operations.

At first sight, it looks as if JP Morgan is simply hedging its bets and backing both agency and principal business models. However,
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The future of Investment Banking (Oliver Wyman/Morgan Stanley)


What’s the outlook for Investment Banking in 2014 and beyond?

Well, according to a new report published by Oliver Wyman and Morgan Stanley, banks need to act fast and re-allocate capital and resources to optimise where they have real advantage, and focus regionally and domestically.

The report which includes results of client surveys suggests clients plan to ‘polarize’ their spend on partner banks and specialists in areas such as servicing multi-asset, whilst squeezing the rest.

This is a really fascinating report (link available at end of this post), well worth taking the time to read, some key takeaways from the report are:

Market under-estimates scope for wholesale banks to increase returns as they are forced to focus on business optimisation and resource allocations

Drivers being: Continue reading

European Market Liquidity Conference – thoughts and comments


Last week I attended the Association for Financial Markets in Europe (AFME) 9th annual European Market Liquidity Conference.

As always with AFME, there had some thoughtful speakers and topical panel discussions, as well as providing good forum for networking opportunities (including providing for the conference iPad’s pre-loaded with delegate names allowing you to reach out to them and make contact).

This year’s agenda focused on the new emerging market structures

  • Liquidity in the new regulated market – the changing market structure
  • Keynote address -Verena Ross, Exec Dir, ESMA
  • Foreign Exchange:
    The renminbi and other Asian currencies
    Impact of regulation on development of the FX market place
  • Fixed Income:
    Development of exchange capabilities
    Liquidity issue, what liquidity issue?
  • Funding European economic growth: the obstacles and opportunities

Below are my notes and some comments from the sessions that I attended: Continue reading

Single-Dealer Platforms and SEFs


This week saw the introduction of mandatory execution on new SEF platforms for certain standardised interest rate swaps. Such swaps will no longer be executed bilaterally between banks and their clients, but rather must be executed anonymously on SEFs.

The move to SEF trading has however been tentative, with many buy-side firms holding back, nonetheless by midweek some 74% of the 372 IRS trades were being executed on SEFs, according to data from Clarus.  Although there are 23 newly registered SEFs , the majority of business so far has tended to flow through to the incumbent inter-dealer platform SEFs.

But what about single-dealer platforms (SDP), how are banks managing the migration to SEF trading? Continue reading

UBS to outsource Fixed Income platform to Murex & ION


Interesting news just out that UBS is to outsource part of their fixed income technology infrastructure to Murex for booking trades and running valuations and to ION for market connectivity gateways and pricing tools.

This decision seems a direct consequence of  the increasing costs of in-house development and ongoing support and enhancement of numerous legacy platforms, and the regulatory pressure and higher capital costs that banks are facing, and that has resulted in Continue reading

CFTC Approves Javelin’s MAT submissions – whilst O’Malia calls the rules ‘flawed’!


The CFTC has just approved Javelin’s “self certified” list of Made Available to Trade (MAT) interest rate swap contracts. This means that from 15th February, in 30 days time, these products will be mandated to trade on SEFs or DCMs, and nowhere else (see below for full list of swaps).

However, it appears that Commissioner Scott D. O’Malia has concerns about the legality of the determination, as he has just released the following statement on the Made Available-to-Trade Determination. As we say, you really couldn’t make this stuff up!

It is hard to imagine a federal agency regulatory process that is more flawed than the Made Available-to-Trade (“MAT”) determination. The Commission staff has certified all interest rate benchmarks and related packaged transactions for mandatory trading on swap execution facilities (“SEFs”) or designated contract markets (“DCMs”), while at the same time, stated that it will consider some future action for all packaged transactions. And to complicate things further, the Commission has been excluded from a major regulatory decision that significantly reshapes current market infrastructure.

It gets worse, as he then goes on to say that:

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EU agree new trading reforms, introduce OTFs & curbs on HFT


* Establishment of Organised Trading Facilities (OTF) – restricted to non-equities, such as interests in bonds, structured finance products, emission allowances or derivatives.

* Limits on Commodities trading net positions - limit the size of a net position which a person may hold in commodity derivatives

* Curbs on High-frequency algorithmic trading: would have to have effective systems and controls in place, such as “circuit breakers” that stop the trading process if price volatility gets too high.

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