Deutsche Tops Bond Trades as Greenwich Warns on Funding

Deutsche Bank AG overtook Barclays Plc as the biggest bond trader last year as rival banks exited fixed-income businesses when faced with stricter capital requirements, according to a Greenwich Associates study.

Europe’s biggest bank by assets saw its share of fixed-income trading volumes slip to 10.7 percent from 10.8 percent, while Barclays declined to 9.8 percent from 10.9 percent, the Stamford, Connecticut-based researcher said in an e-mailed statement today.

The Basel III rules on capital and liquidity, which started taking effect this year, haven’t yet sapped market liquidity, though institutional investors may eventually see funds dry up as fixed-income dealers eliminate trading desks and cut inventory, Greenwich said. UBS AG, Switzerland’s largest bank, was the most prominent firm to exit some fixed-income businesses in 2012 when it decided to scale back its trading arm in the face of higher capital requirements from Swiss regulators.

“What happens when interest rates begin to rise and fixed-income markets begin to sell off?” Andrew Awad, a Greenwich Associates consultant, said in the statement. “When everyone wants to sell, there will be no one on the other side to cross trades with, and capital-constrained banks will have no interest in assuming their traditional role of liquidity backstops.”

Barclays was named the 2012 Greenwich Quality Leader in fixed income after receiving ratings from investors that topped those awarded to competitors by a “statistically significant margin,” according to the statement.

Banks are increasingly crossing trades among institutional clients to generate a liquid market, a process that works well as long as buyers “are in abundance,” Greenwich said.

Deutsche Bank and the largest fixed-income dealers may benefit from their scale as larger volumes give more insight into supply and demand trends, while scale is also necessary to generate acceptable return on investment in the business, Greenwich said.

“It’s quite likely that in highly liquid rates and credit products, the big will get bigger as top-tier dealers leverage the benefits of scale to win even bigger shares of the market,” said Woody Canaday, a Greenwich consultant.

What follows is a table with data from today’s statement and a comparable Greenwich ranking for 2011 for Deutsche Bank, Barclays, JPMorgan Chase & Co., Citigroup Inc. and Goldman Sachs Group Inc. Citigroup and Goldman Sachs are tied for 2012, according to the researcher.

Dealer          2012            2011
                Market Share    Market Share

Deutsche Bank   10.7%           10.8%

Barclays         9.8%           10.9%

JPMorgan         8.8%            9.7%

Citigroup        8.1%            8.5%

Goldman          8.0%            7.6%
Before it's here, it's on the Bloomberg Terminal. LEARN MORE