Post-crisis regulation tends to be spoken about in pretty cold, impersonal terms – the pressure on bid-offer spreads or return-on-equity, for example.
It’s easy to forget there is another type of impact – on the people who work in these markets – but UBS gave a pointed reminder of that when announcing its decision to exit the fixed-income business at the end of October. The cold, institutional language was there: the press release announced a ‘strategic acceleration from a position of strength’. But, this time, so was a stark human impact – around 10,000 job losses.
One of the positions most affected by regulatory reform is that of the over-the-counter derivatives trader. For a start, straightforward proprietary trading is a no-go area for most banks, putting the emphasis firmly on market-making – but even this could be under threat, depending on how expansively regulators choose to define prop trading.
The amount of capital required to support the market-making business will leap for longer-dated, uncollateralised trades. New liquidity ratios will force firms to face up to funding costs. And the market’s changed discounting practices require collateralisation to be reviewed in forensic detail.
A common response to all of this is to focus on shorter-dated, standardised, clearable trades – and to execute electronically where possible in an attempt to cut costs and preserve the profitability of this lower-margin business.
This requires a different skill-set, and not everyone is convinced traders can adapt. In fact, they may not want to - some traders complain the job is no fun any more
For traders, it adds up to a lot of new red tape, a quantum leap in complexity, a reduction in autonomy and – in all probability – a cut in earnings power. Trading is no longer about risk-taking, but client facilitation. And client facilitation is more about optimising the bank’s capital and funding consumption than simply following a customer’s demands.
This requires a different skill set, and not everyone is convinced traders can adapt. In fact, they may not want to. Some traders complain the job is no fun any more, and a good number have left to join hedge funds, proprietary trading groups, exchanges – or have left the industry altogether. The profession has been through changes before, of course, but none as profound as the one currently under way.
Risk now has an app. It’s been in the works for much of this year and was unveiled on November 22. The app faithfully recreates the look and feel of the magazine, and should be great news for all readers who like to download and read publications on trains and flights – or who find their copy of the magazine mysteriously goes missing from their desks (see page 10).