Wholesale & Investment Banking Outlook 2015 – (Excellent Oliver Wyman/Morgan Stanley report)

According to an excellent new report from Oliver Wyman and Morgan Stanley (which is well worth reading), financial regulation and QE are at the heart of a huge shift in liquidity risk from banks to the buy-side, which is increasingly a concern for policy makers.

  • The shift is far from over, liquidity in sell-side markets set to deteriorate further, as regulation shrinks banks’ capacity another 10-15% over the next two years.
  • Regulatory risks are rising for asset managers, as policy makers worry about the risks to financial stability from US QE exit and market structure changes.
  • For the banks, diminishing returns on capital from market making demand even greater efficiency, dexterity and scale to achieve 10-12% returns.

Capital required to make a buck

Capital required to generate $1 of revenues greatly increased across FICC markets

Balance sheet shrinkage

 Balance sheet shrinkage across FICC

There is a liquidity conundrum in fixed income markets facing policy makers and investors: how it’s resolved will have long-term investment implications across banks, asset managers and infrastructure players.

  • Huge shift in liquidity risks to the buy-side as the twin forces of financial regulation and QE have played out.
    • Severe reduction in sell-side balance sheet and banks’ liquidity provision.
    • Balance sheets supporting traded markets have decreased by 40% in risk weighted assets (RWA) terms and 20% in total balance sheet since 2010.
  • Liquidity of secondary fixed income markets is likely to get materially worse.
    • Expect another 10-15% shrinkage of fixed income balance sheet from the largest banks in the next 2 years. As much as 15-25% could be taken out of flow rates
  • Credit markets are the biggest challenge. Unresolved conflict in regulator desires to reduce the disconnectedness between banks to ensure that asset managers have sufficient liquidity to deliver on promises to their investors, and to preserve companies’ flexibility to issue in a wide range of markets.
  • Electronic trading and new marketplaces will grow – but will not solve the fundamental issues. New initiatives to increase electronic trading, new data networks, new agency execution models new marketplaces. However heterogeneity of products will limit how far electronification will go in fixed income markets.
    • FI markets entering a period of accelerating market structure change. A confluence of forces is driving this:

Economic pressures on dealers
Client concerns around liquidity
A desire to manage conduct risks relating to sales and trading activities
Mandated electronic trading (SEFs – Dodd Frank, OTFs -MIFID/EMIR)
New pre- and post-trade reporting requirements
Advances in technology

Fixed Income electronificationPenetration of electronic trading by asset class

Impact on Banks

To hit target returns, banks will need to push further on restructuring the business. We see huge potential for change, with three key areas of focus:

Strategic selection: more tough decisions, focused on FICC businesses and the international footprint
Client service models: shifting from people-based push services to technology-based pull services and being more selective with balance sheet extension
Operating model: shifting from proprietary infrastructure to supply chain based infrastructure

Whole report available here

When liquidity disappeared – FXCM account of EURCHF liquidity in 40mins following SNB announcement

FXCM has published a very interesting account of what they saw in terms of pricing in EURCHF from their bank liquidity providers in the seconds and minutes following the SNB decision to remove the 1.2000 peg at 04:30 on January 15th.

January 15 Was A Market Flash Crash – The Institutional FX Market Failed And Did Not Function: The SNB’s surprise announcement caused a complete institutional FX market breakdown impacting liquidity, volatility, spreads, and execution. Unlike other recent major market events where FXCM’s liquidity providers continued quoting and providing consistent levels of liquidity, January 15 saw an extreme lack of liquidity and pricing

  • No Liquidity – There was almost no available liquidity for approximately 40 minutes
  • Dramatically Low Pricing – External ECN prices went as low as 0.2000 and 0.5000
  • Extreme Spreads – The average spreads of EUR/CHF were more than 2000-3000 pips
  • Extreme Range – The average range of EUR/CHF was 6000 pips

In the first 5 seconds after the EUR/CHF price Continue reading

Central Bank FX Semi annual surveys Oct 14: Record vols seen in 5 out of 6 top centres

The major central banks reported their latest semi-annual FX survey results for Oct 14 today.

Record high daily volumes were reported for London ($3.097bln/day +12.3%), NY ($1,096bln/day +35.1%), Singapore ($481bln/day +30.1%), Japan ($374bln/day +3%) and Canada ($67bln/day +8.5%) with only Australia showing a fall ($151bln/day -14%). London once again dominating the FX market, with volumes in London approaching 60% of global daily volumes.

Top 6 FX centres Apr-Oct 14


Top 6 Global FX centres

Top Global FX Centres (based on Central Bank FX Semi annual FX survey data for Oct 14)

A quick look at the trend in volumes by instrument shows that Continue reading

CLS FX vols Oct14: Vols down -10.9% to $5,290bln/day, whilst setting new record transactions of 1.465mln/day

The CLS settlement system has reported a -10.9% drop in the average daily value of FX trades settled through their platform in October 2014 compared to the record set in September, which is in-line with similar drops seen in Thomson Reuters and Hotspot volumes (although EBS bucked the trend with a 10pct rise).

However, whilst the value of trades has dropped, the number of instructions submitted was up 3.2% at a new record of 1.465mln instructions/day.

Details from the platform and charts are as follows: Continue reading

Incentives for Central Clearing – paper by BIS

The Bank of International Settlements (BIS) has released an interesting research paper which looks at the incentives for various market participants to centrally clear bilateral OTC derivative trades.

Following the financial crisis, G20 leaders agreed that standardised over-the-counter (OTC) derivatives contracts were to be cleared through central counterparties (CCPs). A number of regulatory reforms have been introduced that affect the incentives for central clearing of these contracts. These reforms include requirements to exchange initial and variation margin for non-centrally cleared derivatives exposures, standards relating to the measurement of counterparty credit risk for derivatives contracts, and capital requirements for bank exposures to CCPs.

The paper found that:

Clearing member banks (ie those institutions that clear directly with CCPs) have incentives to clear centrally.

Whilst central clearing incentives for market participants that clear indirectly (ie that are not directly clearing members of a CCP but clear through an intermediary that is a clearing member of a CCP) are less obvious and could not be comprehensively analysed on the basis of the data received in the quantitative analysis.

However, given that clearing members account for the bulk of derivatives trading, the conclusion of the analysis – there are incentives for them to clear centrally – indicates that the G20 objective on OTC derivatives reforms has, for the most part, been achieved.

Continue reading

Are Europe and US moving closer to NDF clearing mandates?

Could clearing mandate for NDFs be closer that we think?

Europe has tended to lag the US by about 18 months in implementing regulatory reforms in general, and trading and clearing mandates in particular.

So, the timing this week of a new consultation paper by The European Securities and Markets Authority (ESMA) on mandatory clearing of swaps and Non-Deliverable Forwards (NDFs) is potentially significant, as it could suggest a more rapid convergence between Europe and US on NDF clearing mandates.

The reason for this is that the paper has been published barely a week before Continue reading

Platform FX Volumes July14: Double-digit falls for most platforms

Major platforms have reported July FX volumes, with double-digit falls across the board, with Thomson Reuters (TR) spot vols down -14.5%  to $98.8bln/day – a record low, whilst taken in total all Reuters FX products are down -11.4%, although still up some 7.6% on a year ago. Overall spot volumes across all platforms are down between -16% and -21% compared to a year ago.

This drop in FX volumes is also reflected in CLS settlement system which reported a -13.7% drop in trades submitted to their platform at $4,710bln/day down from $5,460bln/day in June, although still up 5.4% on a year ago, whilst the number of trades submitted for clearing is down -20.2% over the year.

From this month, TR has changed their reporting methodology, reporting aggregated volume for Reuters Matching, FXall and the Thomson Reuters SEF. Only splitting out volumes for FX spot and aggregating all other products covering: forwards, swaps, options and non-deliverable forwards traded on those platforms. FXall volumes shown in previous months post here.

Individual platform volumes are as follows: Continue reading


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