The fixed income, currencies and commodities (FICC) segment has been the core driver of profits for investment banks over the past decade, but that has changed over the last few quarters. According to a May 8th report from Deutsche Bank Markets Research titled “Why Is FICC So Weak; 1Q14 Global Capital Markets Share”, there are three main reasons for the change.
FICC is not a single trading division. It is really a disparate group of trading businesses ranging from desks specializing in trading low-risk government bonds to volatile currency, gold or crude oil markets. That said, all FICC desks trade something. For big banks, FICC revenues have typically been generated by trading currencies and government and corporate bonds.
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FICC: Bank balance sheets declining
The decline in bank’s FICC revenue boils down to the fact that there’s simply less trading going now than there was a few years ago. According to DB analysts Matt O’Connor and colleagues, investment banks are seeing across the board lower client activity, as secondary volumes have slipped 15% so far this year compared to 2013. The report also notes primary issuance is down 14% for the year, and the slump is even worse with higher margin products.
Supplemental leverage ratios a concern
The looming implementation of the supplemental leverage ratio is also impacting bank’s perspectives on holding capital versus taking risks with trading. The implementation of SLR means large US banks must either build capital or shrink. Even banks just above the 5% minimum required level are considering when the SLR will be incorporated into CCAR. Analysts have suggested this means banks may need to hold 6-7% SLR to exceed 4% in a CCAR stress scenario.
Reduction in rate-sensitive trading assets
The final reason outlined in the DB report for the decline in FICC revenues for banks is that banks no longer see the minimal profits from trading rate-sensitive assets as worth the risk. “…increasing uncertainty surrounding interest rates, i-banks have meaningfully reduced rate sensitive trading assets–down 50% vs. a year ago (or before taper talk began) as maintaining a large carry trade seemingly carries more risk now.”