Right-sizing in FICC – more cuts probably on the way

Last week, Morgan Stanley announced another wave of Fixed Income, Currencies and Commodities (FICC) redundancies. Some 1,200 due to leave the bank, of which around 500 (I have seen this equated to nearly 25%) coming from front-office FICC sales and trading positions, and many being at MD and above level.

In their Q3, 2015 figures released in Oct, they made mention of the underperformance in FICC:

  • Institutional Securities net revenues excluding DVA were $3.5 billion
  • continued strength in Equity sales and trading
  • leadership in Investment Banking with notable strength in M&A
  • underperformance in Fixed Income & Commodities sales and trading
  • FICC sales and trading net revenues of $583m down from $997m in Q3, 2014 primarily reflecting difficult market conditions for our credit and securitized products businesses

Indeed, looking at 2014 full year results below, we can see that FICC contributions to overall revenues have shrunk from around a third back in 2006 to about 10% in 2014. What’s also clear is the growth of their wealth management arm, and like UBS a few years ago, this looks like their new engine room for  growth.


Morgan Stanley EarningsContrasting Morgan Stanley full year revenues 2006 and 2014 with FICC contribution falling from around a third to about 10%

According to Coalition the research firm that tracks FICC revenues of the ten investment banks, Morgan Stanley is currently ranked 4th-6th (light grey shading in table below) in terms of global revenues, as can be seen in the table below. Coalition estimates that 2015 full year revenues within FICC for the top ten investment banks will be around $65bln ($67.4 in 2014 and $73.9bln in 2013), at the peak

Coalition Q3 2015- League TablesTop ten investment banks global revenues (source: Coalition research)

This seems less of a Morgan Stanley specific issue, and more like to continued inevitable consequence of tougher regulation, higher costs of capital and ongoing shift by banks from capital-intensive operating model, to a capital light model, and the continued move by investors to lower margin electronic trading.

Unfortunately, whilst the timing for individuals is dreadful, given the excellent Morgan Stanley/Oliver Wyman research report on the outlook for investment banking, and the continued FICC ‘right-sizing’, this latest move shouldn’t have come as too much of a surprise, as the report itself talked of a 10-15% further contraction in FICC balance sheets.

Balance sheet shrinkageBalance-sheet shrinkage across FICC

This ties in nicely, with the rise of non-bank market makers, stepping up as major liquidity providers in core FICC markets. We continue to see senior players within bank FICC businesses, switching to non-bank market makers.

The likes of Zar Amrolia moving from Deutsche to become CEO of non-bank market maker XTX markets, and Paul Hamill moving from UBS to Citadel, where he is MD, Global head of FICC at Citadel Institutional Solutions inside Citadel Securities, to lead the client-facing fixed income market-making businesses. The latest, announced last week is Jeremy Smart, who has just resigned as head of electronic fixed income distribution at RBS, and according to reports, is on his way to XTX.

The non-Bank market makers are not just providing anonymous liquidity to the ECN’s, they are also engaging in direct relationships with banks, providing them with deep levels of ‘unique’ liquidity – as apposed to re-cycled liquidity, which the banks in turn use for their own market making to their customers. We are in the process of seeing the non-bank market maker segment become major liquidity providers to the liquidity providing banks. We will return to this theme in more detail in forthcoming posts.

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