Capital Rules Drive Shifts in Fixed Income Trading

New capital reserve rules for fixed income dealers resulting in different approaches to the business, have resulted in competitive shifts in the landscape among the major fixed income players, according to Greenwich Associates study released today.

As a clear sign of the shifts, Deutsche Bank, which was last year battling in a three-way tie for market share in secondary trading, seized control of the number one spot in 2012 with 12.2 percent of market share, while Goldman Sachs climbed to second place in 2012, after it tied for fourth place in 2011. J.P. Morgan and Citi came in next with market shares of 10.8 percent and 10.4 percent respectively, reports Greenwich. In a statistical tie for fifth place, Barclays and Credit Suisse round out the market share leaders in U.S. fixed income.

Driving the shifts in market share are “strategic decisions” made by individual dealers on how best to approach the fixed income trading in a new era of increased capital reserve requirements, said Greenwich. The new capital rules have caused dealers as a group to reduce the amount of capital devoted to fixed income and to pare back inventory held for trading, the research and consulting firm said.

Some dealers have chosen to rationalize capital and overall resource allocations to clients based on measures of account profitability. In terms of narrowing their focus of their fixed income franchises some dealers are targeting specific clients or institutional segments. “Others are pulling back from the business on a much more general basis,” commented Greenwich Associates’ consultant Tim Sangston.

Meanwhile, Bank of America Merrill Lynch captured the title of Greenwich Quality Leader in U.S. fixed income sales quality and in U.S. fixed income trading quality. Barclays and J.P. Morgan tied for first place in U.S. fixed income research quality. One of Barclay’s strengths is its leading position in mortgage portfolio/product analytics, notes Greenwich.

The rankings suggest that firms are concentrating resources into specific sectors. Citi dominated the municipal bonds and derivatives sector with 22.9 percent market share, followed by Bofa Merrill Lynch with 14.9 percent and J.P. Morgan with 12.8 percent. In securitized U.S. fixed income, Credit Suisse ranked No. 1 with 14.1 percent share, followed by Bofa Merrill Lynch wtih 12. percent and Barclays with 10.7 percent.

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