Three consequences of the current financial turmoil will shape Europes fixed-income markets for years to come:
1)
When markets eventually revert back to some basic level of functionality, higher costs of capital and more stringent capital requirements will force many dealers to significantly limit their prior roles as suppliers of broad-based liquidity to individual OTC product markets.2)
Attrition among hedge funds will reduce the amount of fixed-income trading volume, revenue and prime brokerage business generated by this important segment of investors, thereby diminishing hedge funds clout in European fixed-income markets.3)
The loss of revenues from structured products will leave a hole in dealers strategic plans that will have to be filled with more vanilla, client-driven, agency-based business.
According to the results of Greenwich Associates 2008 European Fixed-Income Investors Study, client-driven trading revenues earned by dealers of European fixed-income products reportedly declined some 16% to $4.8 billion in the year ending July 2008. In conducting this study, Greenwich Associates interviewed 981 institutional fixed-income investors across Europe.
Some lost revenues will not be coming back any time soon. In particular, the structured credit businesses that represented a big component of revenue and profit projections in dealers three-year strategic plans have been decimated. Those losses, combined with the drop-off in trading revenues from other fixed-income products and the diminished prime brokerage business will leave dealers in search of sources of revenues.
The new sources will actually be old sources, says Frank Feenstra, Greenwich Associates consultant. With structured product revenues gone, dealers will be forced to concentrate on more client-driven, agency based businesses, which could provide something of a silver lining for long-only asset managers, pension funds and other parts of the traditional fixed-income trading base.
A return to a greater differentiation between price takers and price makers in the dealer community is also found. Those dealers whose trading strategies depended on comfortable carry trades will find those no longer available or profitable. They will have to decide whether to go back to old fashioned trading with the attendant risks and profit opportunities or become price takers rather than market makers.
Barclays Becomes Europes Biggest Fixed-Income Dealer
In the midst of these changes, Barclays Capital became Europes biggest fixed-income dealer as it outpaced Deutsche Bank by increasing its European-wide institutional trading market share to 11.7%. JP Morgan ranked as a strong third in trading share. The Royal Bank of Scotland, which benefited from the addition of ABN AMROs trading business during the research period, added market share from 2007 to 2008. Other recent shifts in the competitive landscape, including the merger of Dresdner Kleinwort and Commerzbank, Bank of Americas acquisition of Merrill Lynch and the collapse or near-collapse of firms like Lehman Brothers and Fortis, are likely to have an effect not only in the top ranks of European dealers, but also in the middle of the market.
JPMorgan Leads in Quality, Deutsche Tops in Relationship Capital
Institutions named JPMorgan in Europe best fixed-income dealer for 2008 in terms of its overall level of quality and franchise strength. JPMorgan received by far the highest scores on the Greenwich Quality Index (GQI) this year, followed by Barclays Capital and Deutsche Bank. Barclays scored highest on the GQI in rates products, and JPMorgan received the highest GQI score for credit products. Based on the results of our interviews with 981 fixed-income investors, Greenwich Associates also named the European markets Quality Leaders in several important fixed-income functions. JPMorgan and Deutsche Bank were named Greenwich Quality Leaders in Trading Liquidity, JPMorgan was designated the Quality Leader in Fixed-Income Research and JPMorgan, Barclays Capital and Deutsche Bank shared the title of Greenwich Quality Leader in Fixed-Income Sales.
In addition to the annual questions about dealer quality, Greenwich Associates this year asked European institutions about the levels of support provided by dealers during the crisis, their own willingness or unwillingness to share sensitive information with individual dealers, and dealers understanding of institutions fixed-income business. Based on institutions assessments of dealers in these areas, Greenwich Associates calculated an overall performance score for each dealer a measure called Relationship Capital. Deutsche Bank and The Royal Bank of Scotland had the highest Relationship Capital scores of any major dealers competing in Europe, followed by Barclays Capital and JPMorgan, with the latter two tied for third place. Institutions cited Deutsche Bank and JPMorgan as being the most supportive during the market crisis.
D.C.