New Rules to Cost ‘Small’ Banks $17B in Trading Revenue

New Rules to Cost ‘Small’ Banks $17B in Trading Revenue

According to a report released by Deutsche Bank AG (NYSE:DB) (ETR:DBK) today, new regulations will force many banks out of the bond-trading business altogether while removing $17 billion in trading revenue for global investment banks industry wide.

New Rules to Cost 'Small' Banks $17B in Trading Revenue

According to a report by Lauren Tara LaCapra at Reuters, this summer will see bond and derivative trading on exchanges this summer casting a pall over banks’ ability to trade directly with clients.

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The heart of the new regulations boost capital requirements for banks, as well as margin and collateral requirements for clients. These requirements will subsequently raise the cost of doing business with this type of investment, a cost that many banks will deem far too high to continue.

“We think that the long-run result of these changes will be a wave of industry exits from fixed income, currency and commodities sales and trading by second-tier players,” the analysts said in their report. “For the purposes of this report, we view all banks with less than a 6 percent market share as ‘at risk’ of exit from full-service fixed income, currency and commodities sales and trading.”

Deutsche Bank AG (NYSE:DB) (ETR:DBK) did not include itself in its own study and gave no hints as to which side of this “6 percent” they find themselves at present.

Notable names who are above this 6 percent line include: JPMorgan Chase & Co. (NYSE:JPM), Citigroup Inc. (NYSE:C) , Barclays PLC (NYSE:BCS) (LON:BARC) , Bank of America Corp (NYSE:BAC) and Goldman Sachs Group, Inc. (NYSE:GS).

The report also listed a number of banks that would be forced from this trading fold due to a market share below this watershed number. They include but are not limited to: HSBC Holdings plc (LON:HSBA) (NYSE:HBC), Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS) (AMS:RBS), Credit Suisse Group AG (NYSE:CS), BNP Paribas SA (EPA:BNP) (PINK:BNPQY), Morgan Stanley (NYSE:MS) and Societe Generale.

In October, after UBS AG (NYSE:UBS) said it would exit FICC trading, it announced that they would be cutting nearly 10,000 jobs; others including second-tier players listed above said that they would be able to continue these trading practices despite skepticism from a large number of analysts. Morgan Stanley suggested that by reducing exposure to risky trading areas and increasing exposure to high-volume, low-cost areas like interest rates derivatives, that they could stay in the game.

“Instead of competing for business based on the size of one’s balance sheet, we’re really competing on our content, coverage and what we’ve done with technology,” Morgan Stanley (NYSE:MS) Chief Financial Officer Ruth Porat said in an interview last week. “It changes the competitive dynamic, but I don’t think there is an inconsistency in some seeing headwinds in certain areas and us not seeing it.”

Following the release of today’s report, a spokesperson from Morgan Stanley (NYSE:MS) refused to comment on Ms. Porat’s remarks from last week.

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