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CommentP&M Notebook

P&M Notebook: The great primary dealer debate

GlobalCapital enjoyed the relative calm of a week free of major bank restructurings. But there's plenty of worrying still to do, especially in the sovereign debt business.

Underwriting and trading government debt is pretty much the first thing investment banks ever did, and governments, not corporations, pioneered the Eurobond market. Trading government debt is also one of the activities hit hardest by regulatory change, and if that wasn’t enough, extraordinary monetary policy and technology are squeezing margins even tighter in the business.

And it’s not just principal trading that’s under threat. To judge from the glum mood in the markets, it’s the whole supporting infrastructure. The repo market, even more than cash, suffers from leverage ratio limits, and a transparency regime that simply isn’t designed for it. 

The primary dealership model — balance sheet commitments in return for special privileges — is under threat as well. Balance sheet is more expensive to use, so do primary dealers need better perks? Or is it all part of the great unbundling of investment bank services? It’s no longer good enough to fantasise about fuzzy cross-subsidies; every desk must be a profit centre in its own right.

As if to underline the point, Barclays promoted its boss of “macro” — rates and currencies — to be chief operating officer of the investment bank. It’s hard to escape the conclusion that macro needs more fixing up than any other business division in the bank. More tech spend, more integration, more risk and conduct controls, more comprehensive reshaping. Group chief operating officer Jonathan Moulds, of course, is also a macro guy by training, having cut his teeth in interest rate swaps trading.

And hanging over the debate, of course, there’s Credit Suisse. A conference full of primary dealers and debt management offices was always going to be buzzing about the decision by one of the world’s top investment banks to shut down government bond trading and primary dealerships in Europe. Just for fun, GlobalCapital looked up where the bank was in the 1980s, and it’s hard to credit — the bank had 50% market share in debt underwriting for central governments!

This week, Credit Suisse’s decision started to reverberate through the organisation, with cuts to the SSA origination effort following cuts to SSA trading. The MTN desk was also hit hard.

Standard Chartered also got stuck into the bloodletting process in earnest. It has closed its Hong Kong project finance operation, while the head of DCM and head of sales are also looking for new opportunities.

UBS bulks up for winter

Over at Deutsche, there’s still a flood of organisational memos to come — most notably for our purposes, who runs and manages European debt capital markets, but this week was mercifully quiet. GlobalCapital's David Rothnie wrote an excellent run-down of Deutsche’s possible paths forward in this week’s Southpaw.

Other appointments of note include the continuation rebuild of UBS’s European leveraged finance operation. Last year saw a string of departures and a takeover from the US business, but this year the team has a spring in its step, following the hire of David Slade to run the show.

Slade came to UBS from EQT Partners, but is better known for his time at Credit Suisse. He turned there for the latest hire to the team, hiring Abudy Taha for a new origination role. GlobalCapital understands the bank is still bulking up, but it’s getting a little late in the year for MD hires.

BNP Paribas’ promotion of Rupert Lewis to head of European syndicate deserves congratulations, but had an air of inevitability about it. Lewis will look after IG corporates, FIG, SSAs, and Emerging Markets — but with Derry Hubbard and Nick Darrant leaving, it had to be the head of European corporates getting the job.

The fire hose of regulation also slowed to a trickle this week. Last week the Financial Stability Board had to show the G20 meeting at the weekend some progress, but there should be no other major regulatory deluges until mid-late December.

Both the Basel Committee and the European Banking Authority have developed a worrying habit of throwing out major consultations immediately before Christmas, ruining the festive season for armies of junior lawyers.

Basel did put out a study on the impact of the Fundamental Review of the Trading Book, one element of the so called Basel IV capital changes which have yet to be nailed down. Mark Carney said there was no Basel IV, but what else would you call multiple new capital requirements which have yet to be finalised and might not be come in until 2020?

The strange thing about the study was its apparent pointlessness. Not only does it overlap with a “Quantitative Impact Study” which Basel is supposed be doing, but it actually uses an old version of the regulation to do the study. In other words, it was obsolete at birth — a fact which the International Swaps and Derivatives Association, promoting its own FRTB study, was quick to underline.

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