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AFME Warns On No-Deal Brexit

By
Shanny Basar
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Simon Lewis, AFME

Since the UK voted to leave the European Union there has been debate over whether UK clearers and central securities depositories would be granted equivalence by EU regulators.

The UK’s exit from the European Union without a deal still poses significant risks for the financial services sector, despite the preparations that have been made, according to the Association for Financial Markets in Europe.

AFME said in a report that following the extension of the departure date to 31 October 2019, banks are continuing to implement their contingency plans for a no-deal Brexit scenario due to the ongoing political uncertainty.

Continued access to UK central clearing counterparties and central securities depositories for remaining EU member states, and vice versa, was an area highlighted by the report.

Since the UK voted to leave the European Union there has been debate over whether UK clearers and central securities depositories would be granted equivalence by EU regulators. EU authorities have argued that their substantial activities pose a risk to EU financial stability and so they need increased oversight.

In February this year the European Securities and Markets Authority granted temporary equivalence to three UK CCPs – LCH, ICE Clear Europe and LME Clear – and the UK CSD in the event of a no-deal Brexit, so they can continue to serve EU-based clients and minimise disruption to financial markets.

Simon Lewis, AFME
Simon Lewis, AFME
AFME, led by Simon Lewis, welcomed the temporary recognition but noted that it expires on 30 March 2020.

“Unless certainty is provided as to the extension of recognition, UK CCPs might be required to start off- boarding processes for EU27 members by the end of 2019,” said the report. “We note the European Commission’s recent statement that it would consider whether adjustments are needed to contingency measures to take into account the new timeline following the extension to Article 50 and encourage the European Commission to do so in this instance.”

European regulators are also due to define a new process for determining equivalence for countries outside the EU.

“This is of pivotal importance given the significant threat that the start of an off- boarding process by UK-based CCPs would pose for EU financial stability,” added AFME.

Trading obligations

Esma and the UK Financial Conduct Authority have already clashed over their respective share trading obligations.

In March Esma announced that after Brexit EU firms will have to trade certain shares and derivatives on EU or equivalent venues, even if most liquidity is currently in London.

Nausicaa Delfas, FCA
Nausicaa Delfas, FCA
Nausicaa Delfas, executive director of international at the UK Financial Conduct Authority, warned at the time that this would conflict with the UK’s own share trading obligation.

She said: “This has the potential to cause disruption to market participants and issuers of shares based in both the UK and the EU, in terms of access to liquidity and could result in detriment for client best execution. We have therefore urged further dialogue on this issue in order to minimise risks of disruption in the interests of orderly markets.”

As a result, in May Esma said the share trading obligation would not be applied to 14 UK shares included in its previous guidance.

AFME added: “We also recommend that the UK and EU27 authorities put in place necessary arrangements to ensure continued access of members from both UK and EU27 to infrastructures under their supervision.”

The association also noted similar issues with the derivatives trading obligation.

Continued servicing of existing contracts

The report continued that a further area of focus has been ensuring that existing cross-border contracts can continue to be serviced effectively, including the performance of common lifecycle events.

“While we remain disappointed that this was not addressed at EU level, we strongly welcome the efforts made at national level in many member states and the UK to enable lifecycle events to continue to be performed, at least for a temporary period,” added AFME.

Reporting

The study also highlighted the risk of double reporting under post-trade transparency reporting and transaction reporting requirements.

After Brexit when an EU27 investment firm trades with a UK investment firm, each will have reporting obligations which will lead to a misleading impression of volumes.

Making Equities Market Fairer

By
Rob Daly
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Dave Weisberger

The demonization of rebates has had adverse effects on the equities market, such as an overly broad market access pilot to address conflicts of interest.

It may be time to align the US equities market structure with the rest of the stock exchanges from around the globe.

Similar to the adoption of the Metric System, the US is in the tiny minority of nations that do not use a basis-point model for its equities market, said David Weisberger, CEO of CoinRoutes, during an interview by Nasdaq TradeTalks, earlier this week.

Dave Weisberger
Dave Weisberger, CoinRoutes

The only other two nations that similarly have not adopted the model are Canada and Australia.

Weisberger noted that he attempted to introduce the model a year after Regulation NMS went into effect while he was at the Lava Flow alternative trading system, but if failed as market participants claimed the model was too complicated and did not want to adjust their thinking.

The market has evolved under the regulation’s’ “one size fits all” rules where the “payment for order flow” model has improved the market incrementally.

However, the 30 mil cap or the 30 cents per 100 shares that Regulation NMS has led to a cacophony over whether the rebates are evil kickbacks or a necessary incentive for market makers.

“The facts are agents in the marketplace that do not pass on their fees or rebates do have a conflict of interest, and that is true,” said Weisberger. “That is why the buy-side and other people want this access fee pilot to go on. The other fact is the liquidity providers who are committing their capital to improve markets and make it up while doing it are really important to the market, and they have no conflict of interest regarding rebates.”

The demonization of rebates has had adverse effects on the equities market, such as an overly broad market access pilot to address conflicts of interest.

There are other manners in which markets can provide market makers incentives to make markets, such as providing artificially broader tick sizes similar to the futures market, he added.

“We did a tick pilot, but it was really narrow,” said Wiesberger. “It was only a nickel and only in a tiny segment of stocks. There probably was an improvement, but it was in such a small segment of stocks for such a large pilot that it probably ended up costing people money.”

CDSClear Has Record Month Across European And US Products

By
Giulia Baldini
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There was no discernible change to customers’ use of the service as equivalence secured in event of hard Brexit.

Morgan Stanley has connected to CDSClear to offer clients clearing of credit derivatives as LCH, the clearing arm of the London Stock Exchange, had record volumes in the first half of this year.

LCH said yesterday that Morgan Stanley has become the latest clearing broker to connect to CDSClear.

Mark Bortnik, European head of derivatives clearing at Morgan Stanley, said in a statement: “As an increasing number of our clients either become mandated or look to clear credit derivatives, it’s important that we are able to offer them the broadest range of products. ”

CDSClear had 132 new client accounts that went live in the first half of this year, taking the total of live clients to 149 at the end of last month.

Frank Soussan, global head of CDSClear, said in a statement: “2019 has been an exceptional year for us so far in terms of growing client participation and volumes, and we look forward to continuing this growth trajectory over the coming months.”

SwapClear

Chris Turner, analyst at German bank Berenberg, said in a report in May that LCH is in “robust health” despite the possible threat to the business as the UK leaves the European Union.

Turner said in report: “LSE is a play on two key structural growth themes: secular growth in clearing and increased adoption of quantitative investment approaches. The group’s first-quarter results suggest that the former is in robust health, while the latter is more likely to deliver high single-digit revenue growth than the low double-digit growth we had hoped for.”

The London Stock Exchange Group reported in its first quarter results that income at LCH was up 17% to £182m ($238m). The exchange said in its results statement: “There was no discernible change to customers’ use of the service as equivalence secured in event of hard Brexit.”

Eurex Clearing

Last month Eurex Clearing said ISA Direct, a direct clearing membership for the buy side to clear interest rate swaps and repos, was gaining traction.

Eurex, owned by Germany’s Deutsche Börse, developed ISA Direct as increased capital requirements for banks has made clearing more expensive to provide, resulting in higher client fees or firms withdrawing clearing services. Under ISA Direct, buy-side firms connect directly to Eurex Clearing as a counterpart, instead of going through a clearing member, whilst maintaining legal and beneficial ownership of any securities collateral provided.

Jan Grunow, head of operations at Swiss Life Asset Managers, said in a statement: “By being able to directly connect to Eurex Clearing, our concerns about credit risk and the portability of our assets are much better addressed. The ISA Direct model alleviates many of our concerns and helps us to meet the regulatory requirement of central clearing.”

Another advantage of ISA Direct is that it results in a lower balance sheet impact for banks.

Alexander Jacobs, head of OTC clearing at ABN AMRO Clearing, said in a statement: “The ISA Direct set up offers capital, operational and risk efficiencies for all parties including novel collateral management solutions.”

Last month Barclays also became the first European bank to offer Eurex’s OTC clearing services through its US registered futures commission merchant to US clients.

Citi was the first US-based FCM to offering its clients swap clearing through Eurex Clearing in the first quarter of this year.

Tim Gits, head of fixed income sales Americas at Eurex, said in a statement: “The growth we have seen from US institutions since receiving CFTC approval in late 2018 has been very encouraging, and the number of FCMs and clients in the pipeline is very promising.”

The Commodity Futures Trading Commission authorised Eurex Clearing to offer customer swap clearing in the US in addition to the clearing services for futures in December last year.

Announcement : Rapid Addition new CEO : Mike Powell

By
Scott Galvin
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Rapid Addition names former MD of Thomson Reuters global enterprise division as new CEO

Rapid Addition have named Mike Powell as their new Chief Executive Officer. Majority shareholder, Kevin Houstoun, will remain in his role as Executive Chairman, handing over operational responsibilities with immediate effect.

Based in London, Mike will lead Rapid Addition’s growth plans, building on their position as a leading provider of high-performance enterprise solutions for electronic trading and a pioneer in FIX/FAST and FPGA technologies.

Mike brings his extensive financial markets experience to Rapid Addition having worked on both the customer and vendor side of the industry throughout his career. He is an active participant in the London fintech scene and has spent the last couple of years working with a number of innovative firms to develop their commercial strategies and funding plans. Previously, Mike was the Managing Director for Thomson Reuters global enterprise division, responsible for the data feed and platform business under the Elektron brand.

“Having secured several new tier-1 customers over the last two years, we continue to invest in both our technology and people. As part of this strategy, we are delighted to attract someone of Mike’s calibre to lead the team and drive this next phase of our growth. We see significant opportunity in helping customers evolve their trading infrastructure as regulation continues to push the industry towards an increasingly electronic and transparent world. I look forward to working with Mike to build on Rapid Addition’s position as a strategic technology partner to the electronic trading community.’ Said Kevin Houstoun, Executive Chairman at Rapid Addition.

Mike Powell commented, “Given the ongoing trend of capital market automation across all asset classes, particularly in the domain of electronic trading, it is an exciting time to be joining Rapid Addition. Repeated customer success has proven the value of our technology in creating a future proof platform for electronic trading and customer and venue connectivity.”

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China And UK To Develop Bond Connect Scheme

By
Shanny Basar
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Chinese and UK officials said they want to link their respective bond markets after Shanghai-London Stock Connect launched last month.

Liu Xiaoming, China’s ambassador to the UK, said the Chinese government is committed to opening up financial market in a keynote speech at Bloomberg’s Navigate the New Silk Road 2019 event in London today.

He highlighted Shanghai-London Stock Connect and said the two countries want to launch the equivalent for their bond markets.

The link between the Shanghai and London stock exchanges launched last month. Stock Connect allows established Chinese issuers to raise capital in London while UK-listed issuers can access Chinese domestic markets. It is the first fungible cross-listing mechanism enabling international investors to access China A-shares from outside Greater China. In June Huatai Securities became the first issuer to list global depository receipts in London on the Shanghai Segment of London Stock Exchange when it raised $1.54bn (€1.37bn).

John Glen, MP

John Glen, economic secretary to the Treasury, said at the Bloomberg event that the UK and China are natural partners for financial cooperation.

“We have the potential to accelerate development of China’s bond market through developing UK-China Bond Connect,” added Glen. “Stock Connect has shown that Chinese companies are ready and eager to connect to the world.”

Bond Connect

The Chinese government launched Bond Connect two years ago in July 2017 make it easier for overseas investors to access the country’s onshore bond market, the world’s second largest according to the Bank for International Settlements.

Harvey Bradley, China lead – portfolio manager at Insight Investment said at the seminar that the asset manager is using Bond Direct. Bradley added : “We would also like to access to interest rate swaps and futures through Bond Connect.”

Tradeweb Markets, which provides an electronic trading platform for fixed income, derivatives and ETFs, said in a statement that volumes through Bond Connect reached a record last month. Tradeweb was selected as the first trading link to Bond Connect, after playing a critical role in the initiative’s creation, development and design.

“During June, the second anniversary of the Bond Connect launch, average daily volume in Chinese bonds reached a record $1.1bn on Tradeweb,” added the statement. “This represents a 406% increase since July 2017, Bond Connect’s first month of trading.”

Tradeweb continued that last month there were 1,038 registered investors on Bond Connect, all of who will have access to new functionality launched in this month, including the introduction of pricing streams and the iDeal Messaging tool.

However, Bradley expressed some concerns including the shallow depth of the market as 70% of China’s onshore bonds are held by commercial banks to maturity and the lack of liquidity at the end of the local trading day and the start of the London trading day.

Mei Jin, People’s Bank of China chief representative to Europe, said in a speech at the conference that the government was working on extending trading hours for Bond Connect. She

She added: “We want a more friendly and convenient investment environment.”

Index inclusion

The Chinese bond market became more attractive to overseas investors after it was added to the Bloomberg Barclays Global Aggregate Index in April, with its full weighting to be phased in over 20 months.

David Liao, HSBC

David Liao, chief executive and president of HSBC Bank (China) said at the seminar that Chinese bond trading volumes have more than doubled since ended inclusion in April.

Bradley said Insight Investment has been Investing in the onshore Chinese bond market for four to five years and index inclusion has made the the biggest impact.

“Some clients included China right away but it was too early for others,” Bradley added. “The phased in approach is helpful and a good opportunity to generate alpha.”

Jinny Yan, chief China economist and managing director at ICBC Standard Bank, said at the conference that index inclusion has boosted interest from overseas investors and 91 joined Bond Connect in June.

Nasdaq Looks To Lower Data Fees For The Masses

By
Creating Digital
-

In its recent white paper TotalMarkets, A Blueprint for a Better Tomorrow, Nasdaq advocated for several changes it said would make markets more equitable and efficient.

In its first major policy change action in the wake of launching the TotalMarkets campaign, Nasdaq called for reforms to the definitions of “professional” and “non-professional” users of market data in order to modernize them. The new definitions should have a positive impact on Mom and Pop investors and the companies that service them.

For many years, market data fees have differed for various categories of users. This includes distinguishing between professional versus non-professional users, based on the use case and the ability to pay for the data.  Nasdaq proposes to revisit the working definitions of Professional and Non-Professional to more accurately reflect whether data is actually used in a manner consistent with each category. For example, should a person trading hundreds of thousands of dollars daily at a home office be considered a Non-Professional? Similarly, should a plumbing service in the legal form of a limited liability company (“LLC”) be charged a professional fee if that LLC is a small business that has no connection with trading?

“We should modernize the user definitions to achieve the same general goals while streamlining the administrative process,” the Nasdaq paper explains.

Oliver Albers, Nasdaq

Oliver Albers, Senior Vice President and Head of Strategic Partnerships with Nasdaq’s Global Information Services told Traders Magazine: “The time is right to modernize the distinction between Professional and Non-Professional, given advances in technology and how consumption of data have changed since the definitions were introduced years ago. We want Main Street investors to have greater access to the financial markets, and this will go a long way to help that.”

Albers said that a priority in the exchange’s proposals is making certain that most individuals investing their own money are not paying Professional fees. He argues that Main Street investors rely on the markets to build and protect wealth without paying fees intended for professional and institutional users.

Nasdaq emphasizes five main points in its proposals to clarify the distinction between professional and non-professional investors to alleviate industry burden:

  • Ensuring all Main Street investors are considered Non-Professionals
  • Allowing non-financial small businesses to operate as Non-Professionals
  • Eliminating compliance liability for distributors for good-faith errors in reporting
  • Ensuring that occupational traders are treated as Professionals
  • Clarifying when employees of financial institutions should pay professional rates

“Main Street investors seeking to build and protect wealth are vital to the economy and to our future. We’re engaging with the public to build support for positive regulatory change and increase access to our financial system for more investors around the globe,” Albers said in Nasdaq’s announcement. “Modernizing the distinction between Professional and Non-Professional users is a necessity for modern, efficient markets. It’s important that regulations keep pace with technology.”

As part of its effort, Nasdaq is seeking comment from the public, and plans to assess the industry’s response to these ideas and file a set of proposals with the SEC.

Nasdaq said it will also continue to push for reform on this topic at the Securities Information Processor (SIP) level. The SIP provides a consolidated equity data feed for the benefit of the investing public and also differentiates between Professional and Non-Professional users. It is governed by a coalition of exchanges and market participants and overseen by the SEC.

 

New Sterling FRNs Transition From Libor

By
Shanny Basar
-

New public issues of floating rate note notes mature beyond 2021 nearly all stopped referencing sterling Libor as regulators want markets to move to new risk-free reference rates.

The International Capital Market Association (ICMA), a trade body, said in its third quarter report that considerable progress has already been made with adoption of Sonia in new public issues of floating rate notes over the past year.

The UK has adopted the Sterling Overnight Index Average (Sonia) as its new risk-free reference rate to replace sterling Libor. After the financial crisis there were a series of scandals regarding banks manipulating their submissions for setting benchmarks across asset classes, which led to a lack of confidence and threatened participation in the related markets. As a result, regulators have increased their supervision of benchmarks and want to move to risk-free reference rates which are based on transactions, so they are harder to manipulate and more representative of the market.

Paul Richards, head, market practice and regulatory policy at ICMA, said in the report: “The authorities have warned market firms that LIBOR may not continue beyond the end of 2021; that they need to prepare for the transition to risk-free rates; and that their preparations will be monitored by their supervisors.”

The report said  £20.5bn ($31bn) of Sonia floating rate notes were issued in in the first half of this year, compared with £6.9bn in the second half of last year. There were 35 new FRN transactions referencing Sonia in the first half of this year, up from 12 in the second half of 2018, an increasing amount of secondary market activity; and more than 180 investors.

Paul Richards, ICMA

“As a result, new public issues of FRNs referencing sterling LIBOR maturing beyond the end of 2021 have all but ceased,”added Richards.

In addition, securitisations referencing Sonia have also begin to take place with Nationwide, a UK financial institution, launching the first securitisation referencing Sonia distributed to investors in April this year.

ICMA said: “The adoption of Sonia in new bond issues, coupled with the use of more robust fallbacks in case there are any more new bond issues still referencing Libor with maturities beyond the end of 2021, both help to cap the scale of the legacy Libor bond problem. But they do not solve it.”

Although maturing bonds will reduce the scale of the problem over time, ICMA noted there is a significant volume of maturities beyond 2030, and some bonds are perpetual, with no maturity date.

Interest rate provisions in bond contracts through a process of consent solicitation and the first example occurred this year.  ABP replaced Libor with compounded Sonia plus a fixed spread was launched in relation to £65m FRNs due in 2022. A meeting of the noteholders on 11 June 2019 passed the extraordinary resolution.

“Even so, the use of consent solicitations to transition the whole of the legacy bond market – involving vanilla FRNs, covered bonds, capital securities and securitisations – would be a long, complex and expensive process and would not necessarily be successful,” added ICMA. “This is because individual bonds – which are freely transferable – are often held by many (eg several thousand) investors, and consent thresholds are generally high.”

Europe

The eurozone is transitioning from Eonia, the euro overnight index average to €STR, the new euro short-term rate. Last week the European Central Bank sent a letter to chief executives of significant financial institutions regarding their preparation related to interest rate benchmark reforms and the use of risk-free rates

The letter said: “The purpose of this letter is to seek assurance that institutions’ senior managers and boards understand the risks associated with these global benchmark reforms and are taking appropriate action now to ensure a smooth transition to alternative or reformed benchmark rates ahead of the deadline of the end of 20211 specified in the revised EU Benchmarks Regulation (BMR), taking into account that certain changes in the methodology for relevant benchmark rates as outlined below will be introduced as soon as October 2019.”

The ECB is committed to launching the €STR on 2 October this year and Eonia will be discontinued at the very beginning of 2022. The central bank has asked firms to provide a board-approved summary of the institution’s assessment of key risks relating to the benchmark reform and a detailed action plan to mitigate these risks by 31 July.

USA

The USA is transitioning to SOFR, the secured overnight financing rate. Chris Barnes  at derivatives analytics provider Clarus Financial said in a blog that SOFR traded notional for interest rate swaps hit $50bn in monthly notional for the first time in June.


“All measures point towards increased activity and a more healthy market than when we first started writing about these trades all the way back in July 2018,” Barnes added. “May and June 2019 activity in SOFR was comfortably higher than previous months.”

There is now typically at least one SOFR interest rate swap trade per trading day.

Minimal Disruption In Swiss Equity Trading Volumes, So Far

By
Shanny Basar
-

There was only a small fall in Swiss equity trading market volumes in the first week of this month as Switzerland’s stock exchanges lost equivalence with the European Union.

The European Commission had granted temporary equivalence for stock markets to Switzerland in December 2017, which was extended to 30 June 2019. When equivalence ended more than 300 Swiss shares were removed from trading on European Union venues on 1 July.

Tim Cave, analyst at consultancy Tabb Group, said in a report  that the equivalence assessment was critical because, under MiFID II regulations, EU firms must trade shares on EU venues or equivalent third country venues.

“For context, around 30% of Swiss turnover had been taking place on EU-based venues,” Cave added. “In a retaliatory move, the Swiss issued an ordinance which, in the event of no equivalence, prevented Swiss stocks from being traded on foreign venues (excluding over the counter activity such as systematic internalisers).”

As a result around 300 stocks were de-listed from EU venues including Cboe Europe, Aquis Exchange, Turquoise, Liquidnet, ITG Posit and UBS MTF.

“This was a significant moment for European equity market structure in many ways: Switzerland is the fourth-largest European market by value-traded and, with around 30% of that trading taking place in the EU, the de-listing had a significant impact on trading behaviour; it was the first major example of regional fragmentation since MiFID I’s attempt to promote pan-European trading in 2007; and finally, it offered a preview of what could happen in the event of a no-deal Brexit scenario in October,” said Cave.

His analysis showed that in the first week of this month the level of disruption was minimal, with Swiss market volumes only slightly down from last month despite activity shifting from EU-based venues to the Swiss primary market and its dark book, SwissAtMid. 

“While it remains early days and the impact of these changes will play out over a longer period of time, it is already obvious European equity markets have taken a backward step,” he added. “Yes, the market adjusted to ensure a smooth transition on July 1st, but Switzerland no longer benefits from the greater competition and pan-European venues that emerged from MiFID I. Less choice and less competition could drive up trading costs over time in Switzerland.”

It is possible that the UK could also lose equivalence once it leaves the European Union, and may cause issues because of the number of dual listed UK/EU stocks where the most liquidity is in the UK.

“The EU has already indicated it intends to force EU firms to trade EU stocks in the EU in the event of a hard Brexit,” said Cave. “The UK has yet to state its position on the matter and will no doubt be closely monitoring the situation in Switzerland.”

Anne Plested, ION Markets

Anne Plested, regulatory expert at ION Markets, said in a blog that the financial community’s hopes of an eleventh-hour extension to maintain the status quo were dashed.

Plested wrote: “The impact on market structure will no doubt play out in the coming days. How markets respond is likely to set a precedent as the clock runs down towards Brexit, whatever form it might eventually take.”

Share trading obligation

There has already been a dispute with the UK over the scope of European Securities and Markets Authority’s share trading obligation. In March Esma announced that after Brexit, EU firms will have to trade certain shares and derivatives on EU or equivalent venues, even if most liquidity is currently in London.

Nausicaa Delfas, FCA
Nausicaa Delfas, FCA

Nausicaa Delfas, executive director of international at the UK Financial Conduct Authority, warned at the time that this would conflict with the UK’s own share trading obligation.

She said: “This has the potential to cause disruption to market participants and issuers of shares based in both the UK and the EU, in terms of access to liquidity and could result in detriment for client best execution. We have therefore urged further dialogue on this issue in order to minimise risks of disruption in the interests of orderly markets.”

As a result, in May, Esma said the share trading obligation would not be applied to 14 UK shares included in its previous guidance.

The UK Financial Conduct Authority responded in a statement that it was encouraged that Esma has taken steps to reduce the disruption that would be caused but said further action was needed.

“However, applying the EU STO to all shares issued by firms incorporated in the EU (EU ISINs) would still cause disruption to investors, some issuers and other market participants, leading to fragmentation of markets and liquidity in both the EU and UK,” added the UK regulator.

Deutsche Bank Receives Interest For Closing Businesses

By
Shanny Basar
-

Christian Sewing, chief executive of Deutsche Bank, said the firm has received unsolicited interest to purchase businesses it is closing as it aims to become a focused financing, advisory and capital markets investment bank.

Deutsche Bank said in a statement yesterday it will exit global equities (cash equities, equity derivatives and prime finance.) In addition it will reduce its rates business and accelerate the wind-down of non-strategic assets.

Sewing said in a presentation in London this afternoon: “The days of spectacular ambitions for the investment bank are behind us but competitive and sustainable profitability is coming.”

As a result Deutsche bank has entered into a preliminary agreement with BNP Paribas to provide continuity of service to its prime finance and electronic equities clients, with a view to transferring technology and staff to the French bank in due course if the deal is approved and completed.

“Since we announced the deal with BNP Paribas we have had a lot of unsolicited interest to purchase businesses,” said Sewing.

Deutsche’s investment bank had a return on tangible equity of 2% last year with revenues of €6.8bn ($7.6bn) and it is targeting more than a 6% return on tangible equity in 2022. Despite exiting sales and trading, Deutsche Bank will retain a focused equity capital markets operation.

“We believe that secondary flows are less linked to primary activity,” added Sewing.

In order to provide strategic advice to corporate clients, Deutsche Bank will also keep equity and macro research in core sectors, but declined to give further details in the presentation.

Sewing continued that the investment bank will be globally competitive in its core markets as three quarters of its businesses hold top five market positions. He added that Deutsche Bank is leader in debt capital markets, leveraged finance, structured finance, asset backed securities and commercial real estate and has a foreign exchange platform with focused rates and flow credit capabilities to support the bank’s global corporate and institutional clients. The firm also aims to be a trusted advisor on M&A and debt issuance.

“The investment bank will shrink in size but gain in competitiveness and resilience,” said Sewing. “We will only operate where we can compete and will maximize returns by competing as a market leader.”

Technology function

Deutsche Bank is creating a separate technology function to optimize its IT infrastructure and drive digitalisation of all its businesses. The function will be led by Bernd Leukert who will join at the start of September from German software firm SAP, where he has been a member of the management board since 2014.

“We are making a step change in our embrace of technology to become more efficient and enhance innovation,” said Sewing. “Leukert will help us tremendously, not only in improving our own technology, but also in driving innovation and agility and developing client offerings.”

Deutsche Bank is investing €13bn by 2022 in technology and innovation.

James von Moltke, Deutsche Bank

James von Moltke, chief financial officer of Deutsche Bank, said in the presentation that it was critical not to cut IT spending, which has been running at €4bn a year.

“2019 will be the peak year for IT spend as accelerated software amortization reduces spend in future years,” added von Moltke. “We will generate savings from the vendor rationalization program in the investment bank which started in 2018 as we internalize close to 5,000 full- time equivalents at lower cost.”

Analyst response

Eoin Mullany, analyst at German financial services group Berenberg, said in a report that Deutsche Bank’s latest attempt to restructure the bank is more radical than previous efforts.

Mullany said: “However, it still does not change the fact that Deutsche Bank is exposed to an industry in structural decline (investment banking) and one in which the marginal pricing is to be break-even (German retail). While shares may rally as Deutsche Bank does not plan to raise additional capital for the plan, we would be selling into any strength as its strategy has significant execution risk and leaves it with little room for error on capital.”

The analyst also highlighted that the German bank plans to run off assets that accounted for €2.5bn of revenue in 2018, one tenth of the group total, and he is concerned that this could impair the franchise further, leading to additional revenue attrition.

“We saw this in 2018 when Deutsche Bank removed €100bn of leverage assets from the corporate and investment bank while expecting a limited impact on revenue,” said Mullany. “Only one quarter later, it downgraded its revenue guidance, citing a greater-than-expected impact from the restructuring.”

Von Moltke said in the presentation that there is likely to be a revenue impact in businesses that are adjacent to the ones being closed.

“However, this will be offset by growth as we become more competitive,” added von Moltke.

Mullany continued that Deutsche Bank now targets an 8% return on tangible equity in 2022 but this relies on growing core revenues by over 2% per annum while reducing adjusted costs by €6bn to €17bn. He concluded: “Considering the adjustments it is making and the potential second order effects of this, we struggle to see how it will deliver on this target.”

Christian Sewing,. Deutsche Bank

Sewing said in the conference that he was confident that Deutsche Bank would meet it’s targets. “The times of over-promising and under-delivering at Deutsche Bank are over.”

The chief executive continued that analysts and investors may feel they have heard about restructuring plans from Deutsche Bank before, but this time is different.

“This time we are coming to investors to share the burden,” said Sewing. “This time we are not asking for additional capital. This time we are defending weaknesses, we are not trimming but shutting down businesses.”

Sewing added that he will be investing in the bank so he has a personal stake in the restructuring.

The bank will hold an investor day in the fourth quarter to give more details of its plans.

Three Charts That Show How Dramatic The Drop In Stock Splits Has Been

By
Traders Magazine
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By Phil Mackintosh, Chief Economist, Nasdaq

Data shows that since the turn of the millennium, stock splits have become decidedly unpopular.

Back when humans had to calculate indexes by hand, the Dow was built to include one share of each ticker. That meant all you had to do was add up share prices and you had your index. That also seemed to encourage companies to keep their stock prices closer to “optimal” trading levels, which we’ve shown seems to happen when the stock naturally trades between one and two ticks wide.

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Stock splits have become unpopular as markets have automated.

Data shows that since the turn of the millennium, stock splits have become decidedly unpopular.

Back in the 90’s it wasn’t uncommon for 50 stocks (or 10%) of the S&P 500 to split (Chart 1). This helped keep stocks in a relatively consistent price range (Chart 2) which in turn maintained more consistent tradability characteristics across the index.

However, since the credit crisis the number of stock splits per-year has been closer to 10, just 2% of all tickers per year, despite the index rising more than 200%, which would triple the price of an average un-split stock.

Chart 1: Number of stock splits annually by S&P 500 companies

stock_splits_online

Average stock prices have risen as stock splits have declined

Not surprisingly, the lack of stock splits has caused average stock prices to rise.

These days around one-third of S&P 500 companies are over $100 per share—a level where we’ve shown that even the most liquid stocks start to trade more than one tick wide.

In fact, the simple average of stock prices is now around $100 per share, thanks in part to 5 stocks trading over $1,000 per share. However those high priced stocks also need to trade fewer shares to trade the same value, which tends to reduce their ADV for the same notional liquidity. As a result the trade weighted average price:

  • Of the S&P 500 is currently closer to $74
  • Of all stocks is around $49
  • Excluding ETFs, the trade weighted average of all stocks is around $44

    • Chart 2: Almost one third of S&P 500 companies today have prices over $100 per share

    nasdaq_2_online

    Source: Nasdaq Economic Research

    It’s also interesting to see the change in composition of the S&P500. Back in 1990:

  • 80% of its stocks were priced below $50 per share—that number is now just 27%
  • There were no stocks over $200 per share, there are now 65 stocks

    • Chart 3: Change in price composition of the S&P 500

    s7p_500_online

    Source: Nasdaq Economic Research

    For traders, this is important. As we have shown in many recent posts, the one-size-fits-all rules of Reg NMS affects tradability of stocks:

  • As prices rise round lots become too large for many traders, so the order book increasingly fills in with odd lots
  • Conversely, as prices fall, one-cent spreads become too large (in %), leading to unusually deep queues, slower fulfillment and more inverted and mid-point trading
  • In both cases, spreads actually widen increasing the costs of trading.

    • For portfolio managers and brokers it also distorts commission allocations. Although because brokers bundle commissions, investors don’t see the economic cross-subsidy given to support research and trading in the highest priced stocks, because commission spend is based on all shares traded.

    Although high-priced stocks might look good to management, they aren’t great for investors. That’s because they cause a whole lot of distortions, from limiting the ability to allocate stock compensation, to increasing the risk of a single round lots or options contract, increasing costs for investors and distorting trading economics for brokers. To address the trading issues, we’ve called for intelligent ticks in TotalMarkets, but an even better solution is right-sizing stock prices.

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