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Derivatives Reform Clouds Wall Street Hiring, Strategic Moves

The constantly mutating Senate financial reform bill has caused agitation and some strategic relocations on Wall Street, although a growing consensus believes the final bill won't greatly affect the ability of financial institutions to trade derivatives.

That wasn't the case as late as last month, when Sen. Blanche Lincoln, D-Ark., inserted an amendment that would require most derivatives contracts to be traded on a public exchange and cleared through a third party. That amendment would also require many banks to spin off their derivatives trading into a separate affiliate.

Bankers and traders now believe nothing so game-changing is likely. "The derivatives traders I know are not concerned about it," says Ross Freeman, chief executive of New York-based recruiting firm 680 Partners. Further, Freeman predicts the final bill won't have much of a bite, noting that Wall Street is a major contributor to both political parties and that the horse-trading is getting furious in Washington.

"I don't think (the Senate bill) is going to bar proprietary trading," adds Jay Gaines, head of New York search firm Jay Gaines & Co. "I don't think we're going to change the profile of the Street."

Whither Derivatives Trading?

It's also unclear whether a proposal many had assumed would be unavoidable - mandating that banks move entirely to electronic trading of derivatives on exchanges - will make the final cut. That assumption has whetted the appetite of third-party exchanges and already caused some Street developers and IT pros to make the move to exchanges.

However, in recent negotiations the word "trading" was cut from the phrase "trading facility" in the definition of "swap execution facility." A minor cut, but one with major implications. The U.S. Commodity Exchange Act defines "trading facility" as one prohibiting phone trading, but if the definition is now only "facility," it could mean banks can continue to do trades via phone, which is how most OTC derivatives currently operate. To further muddy the waters, legislators have yet to define the terms "standardized" or "clearable" in the bill.

For Street developers and IT professionals, this presents a quandary. Many had assumed derivatives trading would be mandated to move entirely to electronic exchanges. In that case Street firms still in the derivatives game would need to staff up on compliance and tech personnel. E-exchanges like MarketAxess and GFI Group would need to boost hiring too. Now there's potential for a confusing period during which regulators have to formalize decisions based on vague legislative language.

Some Traders and Developers Jump Anyway

On the other hand, Street derivatives traders' jobs no longer seem endangered, as even FDIC head Sheila Bair weighed in against the Lincoln proposal.

Although Gaines doesn't envision dramatic changes happening overnight because of the bill, he says "the legislation over time will likely influence the movements of traders to better enabled, more receptive environments." Even if the final bill doesn't require Wall Street to spin off derivatives and prop trading desks, the prospect of losing a job because of federal legislation has already become the last straw for many professionals.

Citigroup has been bleeding prop traders this year. Jay Glasser, a former Citi derivatives trader who began who joined Nomura Securities early this month, reportedly told his bosses he did so because he feared Citigroup would be forced to divest or close its prop-trading units.

One recruiter said a derivatives trader he knows at a top Wall Street firm had a huge year in 2009 but "his bank couldn't give him a big bonus because of all the politics." Add to that the irritation of worrying his desk would be forcibly spun off, and the trader's now looking to jump to a hedge fund, the source said.

What's more, cuts and consolidations could hit derivatives professionals regardless of how the legislation shakes out. The banking consultant said he wouldn't be surprised if Citi, for example, got out of derivatives and proprietary trading entirely in the future. "I think they're going to be emphasizing their retail business going forward and there's going to be a migration out of the trading side." He said Deutsche Bank's decision to pull out of proprietary credit trading could be a harbinger for Citi.

AUTHORChris O'Leary Insider Comment
  • T
    1 June 2010

    A big part of the problem is also the fact that the ordinary American is too lazy to take the time out to understand their own finances and they allow wallstreet to define what it means to them thereby playing God.

  • TC
    12 May 2010

    A big part of the problem here is that almost every American's finances need to be managed, and yet almost none of them understand what that process entails. The true meaning of risks and rewards are lost on them when an advisor tells them that they can beat the market, or "Now is the time to invest." To an ignorant investor, that is a call to action stronger than the voice of God. To many of us, it's clearly hyperbole, resting on the shady side of marketing. We need to start requiring finance classes in high school so people can have an opinion outside of "look at how much money all these crooked banks are making." Certainly, the banks are not entirely innocent, and some have engaged in activities which, though not illegal, are unethical (like Goldman setting up a fund for the sole purpose of being shorted, and then actively selling it). You throw unethical behavior into a population which has little sympathy for the industry, and this is what happens. The solutions supported by the public may not be quite the most useful, but the banks can be blamed for that for failing to understand their customer.

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