Regional U.S. banks and broker-dealers are finding today’s debt capital markets (DCM) to be “an exercise in high cost and low return,” leading many to consider outsourcing and other cost-saving measures, according to a new report by market research firm Aite Group.
In the Aite report, “U.S. Capital Markets Debt Trading: A State of Disparity,” the researchers uncovered that small, regional DCM firms “are finding it more and more difficult to maintain a trading presence in many fixed income markets” and that “the increased cost of personal, compliance and systems is forcing many to scale back trading operations, risk exposure and client segments.
“Some firms will exit low-margin, high-capital businesses such as repo trading, securities lending, and government debt trading,” says John Mangano, an analyst in the Institutional Securities and Investments group at Aite Group in a statement. “Given the pullback in many DCM operations, some see opportunity with less competition and hope to capitalize when rates rise and volatility returns.”
As market dynamics drive a wedge between the capabilities of the largest global banks and asset managers and their smaller brethren, profit levels at many DCM firms have been negatively impacted, the report says. As a result, many smaller DCM firms will feel compelled to “discontinue, spin off, outsource or enter into joint ventures for some debt trading operations” to lower regulatory and personnel costs and boost margins.
The report also finds that strong relationships with buy-side clients will be key to ensuring the success of sell-side firms going forward, because “market electronification will only take companies so far” and as a result, “in times of limited liquidity or market stress, relationships will prevail.”
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