P&M Notebook: A victory for common sense?

If you spend more than a few hours watching investment banks, it can drive you mad. The habit of calling the same business different, contradictory, or meaningless names across different banks is partly responsible.

Take Deutsche Bank. Why call an investment bank an investment bank when you can call it “Corporate Banking & Securities”. Is that more descriptive and more accurate than “Corporate and Investment Banking” or “Global Markets”?

Primary debt business mostly happened through the “Capital Markets and Treasury Solutions” business, run by Miles Millard. The business was basically bond underwriting, with a smattering of transaction banking and corporate derivatives. That corresponds to “DCMCS” at UBS, or “Financing and Risk Solutions” at RBS. Consequently, Deutsche possessed both regional heads of “CMTS”, and global co-heads of debt origination.

Deeper down the rabbit hole. For unfathomable quasi-historic reasons, all of Deutsche’s structured finance business — financing, origination, trading, structuring, commercial real estate and, for some reason, insurance and pension ALM, was in one giant division segregated off from the rest of fixed income.

Employees loved the co-operation, sheltered from DB politics under the powerful wing of the boss of the division, Elad Shraga (it is said he used to fly jets in the Israeli military), and making 60% RoE. When Shraga moved on in May this year, Dan Pietrzak, who took over in Europe, was equally popular.

But for all its benefits, it was a deeply strange way to run a business. A structured finance team with its own salesforce, origination and trading made for a hell of an operation — but at what cost to the rest of Deutsche?

Now both of these idiosyncrasies are gone, and a refreshing simplicity has returned to the bank. Primary debt will be handled by a division called “Debt Capital Markets”. Credit products, including structured finance, will be handled by a division called “Global Credit Trading”. Issuer-facing business is “Corporate and Investment Banking”, investor business is “Global Markets”.

So what of the changes themselves? In primary debt, the biggest upset is surely the departure of Miles Millard, the architect of CMTS and the co-head of EMEA corporate finance, after 27 years with the bank.

The new primary debt business folds leveraged finance in with CMTS, and it looks like levfin has won the battle for control, with Mark Fedorick, a former US-based high yield origination boss, taking over the division. 

Deutsche’s bankers are waiting to find out what this means further down the tree. Will there be a wholesale takeover of DCM by leveraged finance? Deutsche’s product specialists are surely safe — the bank has no plans to relinquish its dominant position in bond origination — but the team still has plenty of managing directors that need to demonstrate their value.

Questions also remain over Karl-Georg Altenburg’s role in the new Deutsche. Altenburg joined the firm from JP Morgan, presiding over a revamp of the corporate finance business in Europe as Millard’s co-head. But whatever he will be doing in the new structure, it doesn’t involve a job on the CIB executive committee. The German press reported on Monday that he was also jumping ship.

In markets, the main change is the collapse of the structured finance vertical into credit — which has been upgraded from “credit trading” to “global credit trading” as a result. The structured finance management is on its way out. Pietrzak jumped ship to KKR, while Tom Cheung, the Americas co-head, is also leaving. But the merger still looks more like a reverse takeover. John Pipilis and Chetankumar Shah will be co-heads. Pipilis has run the institutional client debt group, but is a structurer by training and managed the distribution network in structured finance.

Also notable is the rise of Sam Wisnia, the ex-Goldman structurer who has been running European rates. He was brought on board last year with a brief to improve the analytics, systems and efficiencies across Deutsche’s trading divisions, and has now been given Americas rates to manage as well. GlobalCapital hears whispers of quant hires and the rise of e-trading and algorithms.

But, though Deutsche keeps on giving, it’s not the only thing in the market this week. UniCredit also announced a new strategy, making that four banks in four weeks (Credit Suisse and Standard Chartered, along with Deutsche, also unveiled them).

For UniCredit though, the investment bank is the least of its problems. The joint venture with Kepler Capital Markets took out a lot of cost and complication, leaving UniCredit with a decent client list in financing, a huge pool of near-captive clients in the corporate bank, and a great market position in central and eastern Europe. While competitors have suffered from volatility and its effect on primary markets and spread products, UniCredit has kept on trucking.

More recently, the bank’s hire of Stefania Godoli from Morgan Stanley to run ECM looks like the start of an investment banking build-out, but it’s hard to see much other evidence of it.

The £1.1bn tie-up between ICAP and Tullett is small fry by investment bank standards (even tiny RBS still has £80bn of assets in its investment bank) but shows the way the industry might go. The troubles of brokers are the troubles of markets divisions at all investment banks.

Technology ought to make trading easier, faster, cheaper and more transparent (with a little push from regulation), but inside the heads of the brokers and salespeople is a tremendous amount of market knowledge, experience, and deep relationships — which banks want to monetise, not to banish. For larger orders, there’s no substitute for human involvement in a trade.

So while ICAP bets on the world of technology, particularly its capacity to scale up quickly and cheaply, Tullett has doubled down on the telephone. Voice broking might have no obvious reason to exist, any more than vinyl, but similarly it’s still popular. And when done in size, the margins on offer are well worth having.

This, if anything, is how the investment banking industry will go — firms swapping assets, joint ventures, cross-shareholdings and careful capital arbitrage. Those activities that can be down outside big banks will move there, as penal capital rules force them out, but some firms will switch out of sub-scale businesses, while others take the chance to build up. Fewer firms will be present in each niche of geography and market, and those that are will reap higher margins.

In the regulatory world, the Financial Stability Board has been building up to its big moment — the presentations to the boss. That means the G20 meetings over the weekend, when the organisation of rich countries is expected to rubber stamp the agreements that have been hammered out all year.

For the big banks, the deal on Total Loss Absorbing Capacity is the most important change. The ratio, at 16% of risk-weighted assets (18% after a longer phase-in) has come in at the low end of the range. But over the past year, bankers have started to worry a lot less about the quantity of TLAC debt that needs to be raised, as different jurisdictions have opted for cheaper, statutory solutions which render much existing debt “TLAC-eligible”.

But the paper still fails to deal with the hardest problem in international banking: how to establish trust between the regulators of international banks. Internal TLAC rules, which set out how "material subsidiaries”, “resolution groups” and holding companies pass loss-absorbing capacity through the corporate structure, are still deeply unclear. Every regulator has an incentive to trap as much capital as possible in the subsidiary it manages — and the TLAC rules have no way to stop them.

The FSB can also trumpet progress on shadow banking. A proposal for minimum haircuts on non-sovereign repo should be inconvenient, and is probably unnecessary, but better documents for repo should be worth having.

These follow ISDA’s “resolution stay” approach — essentially agreeing that when a big bank goes down, its counterparties can’t just close out trades, take the collateral and run. At a high level, that’s exactly the point of collateralised lending, or collateralising derivatives. It’s also the exact point of the TLAC rules, which effectively make derivatives, repo and other “excluded liabilities” super-senior in a bank’s capital structure. But including the possibility of resolution is only going to make a bank safer, while giving regulators another stick with which to beat up the big banks.

The other big news was the likely delay to MiFID II implementation. It wasn’t a total surprise. Nobody in the market, or in the regulatory establishment, could see how implementation could ever work on time. But if a delay is confirmed, it’s a huge relief. Banks, brokers, exchanges and data providers had been working hoping for the best, but preparing for the worst, and will still, no doubt, push to meet the January 2017 deadline, but won’t be in breach of the law if they don’t.

The legal mechanism for pushing back the due date involved re-affirming the whole law, convening the European Parliament and Council for the purpose. Lawmakers are anxious that this will provoke another round of industry lobbying on the most-hated provisions (pre-trade transparency for packaged transactions, payments for research) and a revisit of the bunfights under the Barnier commission.

The tone from the industry appears to be resignation rather than appetite for another fight, but that doesn’t mean it won’t happen — late-stage victories in persuading UK, French and German authorities round to IBIA measurement for bonds may have heartened lobbyists, and even the architects of MiFID acknowledge that it’s flawed.