Banks look to invest in FX again as scandals fade

By Patrick Graham

LONDON (Reuters) - After two years of scandal, job cuts and regulatory upheaval, there are signs that banks are ready to invest again in one of their biggest cash cows, foreign exchange trading.

First-quarter results from leading banks show all trading struggling to reach the 12-13 percent return on equity the industry expects.

But after a volatile six months, and with negative interest rates crushing returns elsewhere, they also suggest foreign exchange is the best of the bunch.

Senior managers with major players in the currency market say they are prepared to hire after two years of paralysis in which 38 of the most experienced traders were suspended.

But they also say new investment is likely to focus on dealing with a new regulatory approach and expanding the machine-driven trading which now accounts for 90 percent of business.

Mike Goggin, an ex-trader and broker whose firm Brookleigh recruits dealers and other foreign exchange staff for several top 20 banks, says bonuses for most FX traders have fallen by 50 percent or more in the last few years.

He says the return of volatility since the middle of last year has encouraged banks' FX managers, although the shock of the Swiss franc's move on Jan. 15 has led most to rewrite 2015 business plans.

"Bonuses undoubtedly have come down," he says. "Whereas in the past some dealers would be expecting total remuneration of 5-10 percent or possibly more of annual trading profit and loss, it's now more like 2.5 percent or even less."

That means a senior trader who brings in revenue worth $25 million-$30 million (£16.1 million - £19.4 million) for a bank and might have expected to earn $1.5 million in the past, is looking at $700,000-$800,000. While that shift looks to have bottomed out, it has made base salary more important and made it harder for senior people to move.

"I don't think anyone will be hiring aggressively, but you are seeing some more movement now," said a source at one of the top five currency trading banks.

"Headcount has been cut substantially and there is probably room for banks to do more after the year we've had."

AUTOMATION

Two departures from Deutsche Bank are among a handful of recent high-profile moves among traders, but recruiters say most in demand are compliance and regulatory officers, electronic trading experts, mathematicians and programmers.

The chaotic market response to the Swiss central bank lifting its cap on the franc has prompted some big clients to ask for more personal supervision of their positions.

But "what the franc trade said to me is that they haven't got it right and you need to put more money into automation," said Peter Jerrom, previously head of global options trading for Unicredit, and now running a derivatives business for London brokerage Sigma.

"You need deep pockets to do that and we're probably going to see the top guys continuing to pull away."

The biggest names in forex by far are Citi (C.N), Deutsche Bank (DBKGn.DE) and Barclays (BARC.L), controlling around half the market, followed by JP Morgan (JPM.N), HSBC (HSBA.L), UBS (UBSG.VX) and Bank of America Merrill Lynch (BAC.N).

JPMorgan equity analysts estimate that this reporting season will show revenue from Fixed Income, Currency and Commodity (FICC) trading rising 9 percent year on year with FX as the best performer thanks to a 30 percent rise in volatility.

Bank of America, reporting this month, said its currency business recorded its best revenues since it acquired Merrill Lynch in 2009 and Barclays on Wednesday reported a 13 percent rise in its Macro trading segment.

The head of FX trading at another top five bank, speaking on condition of anonymity, told Reuters his bank and others were prepared to invest more capital, chiefly in greater allocations to currencies of balance sheet risk.

"We've had 9 months of tremendous growth of volumes and client activity," he said. "FX as an asset class is a bull market investment again."

(Editing by Nigel Stephenson/Ruth Pitchford)