UBS announced this week that it is essentially getting out of the bond business. The same week, its arch rival Deutsche Bank said it made a 15% profit on its fixed income business.
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UBS said it was closing down its fixed income business to focus more on investment banking.
Regulatory changes that could adversely affect already slim margins may also cause others to exit or severely curtail their fixed income business activity.
Deutsche Bank benefited when the European Central Bank announced it would take measures to ease the credit burden of Spain and other distressed countries.
That move gave investors enough confidence to bring their cash in off the sidelines. Trading volumes in fixed income on both sides of the Atlantic surged. So did the prices of their bond holdings.
If the situation in Europe gets worse, bonds could make another downswing.
What is commonly referred to as FICC or fixed income, currencies, and commodities encompasses a range of trading segments including foreign exchange and commodities like oil as well as government, high yield, and mortgage bonds.
Investors rewarded shares of UBS with a 17% rise in stock price. The new rules that will come into play for banks’ fixed income and mortgage departments are the stiffer loan loss reserve requirements and the requirement to move some trading and clearing operations to exchanges.
Fixed-income is a scale-dependent business because of fixed costs such as technology and regulatory compliance that banks must pay to be involved in the marketplace regardless of size.
A number of large participants in the industry say that the economics of the business
will improve as more players exit the industry.
But none are indicating publicly that they intend to follow UBS’ lead.