Equity derivatives are THE HOT area

As we noted yesterday, JPMorgan analyst Kian Abouhossein and colleagues have put out a new report. It is 176 pages long and much of it deals with the future for equity derivatives.

If you work in equity derivatives, or aspire to work in equity derivatives, this is what you need to know - distilled.

1) Equity derivatives are going to be the 'key determinator' for IB wallet growth

FICC is dead. IBD has yet to come to life. Equity derivatives are the only hope.

Abouhossein is predicting a 10% CAGR for ED between 2010 and 2012 based on, 'higher long-term profitability, lower operating gearing, and more diverse business mix.'

2) They're hot, but it may feel like equity derivatives are cooling down

While 10% CAGR is not to be sniffed at, Abouhossein says the business has historically grown at a rate of 15%. The slowdown is predicated on: less client leverage; demands for more simple structured products; new capital rules for banks reducing profitability.

3) You really do want to be working in ETFs, Delta One, strategic corporate derivatives, or emerging markets equity derivatives

This is where Abouhossein thinks the real growth will be. He's predicting that ETFs will grow 20% per annum between 2010 and 2012, that 'strategic corporate transactions' will grow 10-15% per annum, and that Delta One products will grow 9% per annum.

4) You really don't want to be working in flow equity derivatives

Most banks have been building their equity derivatives flow businesses and Abouhossein sees clouds ahead. "Overcapacity is building up in flow equity derivatives, with all

players aiming to take market share in a business which is becoming commoditized," he warns ominously.

The reason for this?

"Margins are under pressure both in the US which also has a well developed retail

market for listed derivatives, and in Europe where the relatively large OTC business

is moving progressively on exchange."

5) You really don't want to be working in structured equity derivatives for a US bank

US banks' structured equity derivatives businesses are likely to be affected by Section 716 of the Dodd-Frank Bill in the US, which prohibits the Federal Government from bailing out organisations involved in equity derivatives swaps activities and could lead to US banks segregating their structured equity derivatives operations in different businesses.

This would lead to hassle, higher capital requirements and higher funding costs.

"If this scenario materializes, smaller players in structured equity derivatives

such as MS, BoA, and Citi with c.$0.3bn of revenues could consider exiting the business to refocus on other equities businesses with higher ROE," Abouhossein predicts.

On the other hand, French banks' structured equity derivatives teams will do well out of all this and look like 'employers of choice.'

6) If you must work in flow equity derivatives, work for Goldman Sachs or SocGen

As flow equity derivatives businesses becomes more commoditised, success will be all about being at the centre of the flow and having the scale to provide liquidity. This will favour existing market leaders who are (in descending order): Goldman Sachs, SocGen, and BNP, UBS and Barclays.

7) Hiring will be spotty, but watch the Swiss banks

The great joy of equity derivatives according to Abouhossein is that no bank is strong in all areas; all have gaps to fill.

Despite this, equity derivatives headhunters are far from erupting with excitement.

"The volatility in May changed the minds of a lot of decision makers regarding their hiring plans. I don't see a lot of recruitment taking place this year," says Jeremy Kemp at search firm Jeremy Kemp International. "We are, however, seeing some activity in Delta One, ETFs and emerging markets - these are definitely the areas of activity."

Despite this, Abouhossein thinks Credit Suisse will be hiring, based on, 'growth plans in listed derivatives and delta one,' and an intention 'to expand its flow and corporate footprint in equity derivatives whilst building up scale in APAC.'

UBS is also to be watched. In June, it hired Yassine Bouhara from Deutsche to head up its equities division, and Bouhara's expected to do lots of recruiting. Dixit Joshi's arrival at Deutsche is also expected to precipitate hiring, although maybe not as much as at UBS, given Deutsche's ED business is already well established.