Derivatives Careers On the Upswing

Is an uptick in derivatives job creation looming? It could be, now that a U.S. regulatory overhaul that largely spares banks' derivatives activities is finally about to become law. Recent steps by both Daiwa Capital Markets and JPMorgan underline the point.

The case for a derivatives revival is laid out by Simon Boughey in a recent Financial News column. He concludes:

Daiwa Capital Markets clearly believes there is plenty of life in the derivatives model. It announced last week that it has acquired KBC's global convertible bond and Asian equity business lines for $1bn. .... Daiwa hopes this buy will be the cornerstone of its construction of a leading Asian derivatives business.

In spite of the dearth of liquidity in the equity derivatives market in the first half of this year, Daiwa is still prepared to step up to the plate and give it a go. Others might join it as some of the clouds over the derivatives market begin to lift.

In another segment of the derivatives market and another segment of the globe, JPMorgan this month completed the purchse of RBS Sempra's oil, coal, metals and European power and gas businesses for $1.6 billion. The U.S. banking giant's appetite for that deal proves its commodities chief, Blythe Masters, is undeterred by the new reform law's requirement that banks spin off commodities derivatives into a separate entity. Indeed, Masters reportedly dismissed that facet of the reform bill as "fine tuning more than material impact."

Behind the Optimism: Benign Reform Law, Volatile Markets

While earlier versions of the U.S. reform law threatened to separate all derivatives dealing from a bank's corporate balance sheet (which would likely force institutions to raise added capital to support spun-off derivatives units), the final version exempts the most frequently traded classes of derivatives: interest rate swaps, foreign exchange derivatives, bullion swaps, investment grade credit default swaps, and instruments banks say they are trading to hedge their own risks. That leaves only speculative-grade CDS, equity derivatives and over-the-counter commodities forced into separate entities. So, Boughey observes, "The great bulk of the derivatives business will go on as before."

Current market trends also may incline banks to beef up derivatives teams, Boughey suggests:

There is robust demand for hedging instruments. The continuing sovereign debt crisis, the European bank stress tests and the gathering fear of double-dip recession all hang over the market and mean that implied volatility should have a fairly elevated floor over the next few months....

So, to both hedge risk and to trade for gain, derivatives could well enjoy a mini-boom in the second half of this year.