Q. Like many acronyms this has more than one meaning – but today we’re talking about “Fixed Income, Currencies, and Commodities” businesses at some big banks. And its in the news again because of Congressional investigation in the activities of the Morgan Whale.
A. Yes, it is, but that’s not the only reasons that the “FICC groups” within several major financial institutions are a story. They are huge drivers of revenues for the banks, but that revenue source may be coming under some pressure soon. (And by the way, FICC also stands for Fixed Income Clearing Corporation, which is just what it sounds like, but that’s not the one in the news.)
Q. So what’s going to impact their results?
A. There are a whole bunch of new rules, largely driven by Dodd-Frank, regarding the derivatives marketplace, that $24 trillion beast that lots of regulators, and even ISDA itself, its trying to get a handle on. The impact of these new efforts is starting to become clearer, and some analysts are saying it could cause a revenue hit of $1-$2 billion a year for the bigger institutions. It’s particularly important for the swaps business, which is both huge and profitable on a per-trade basis.
A. It’s really a combination of Dodd-Frank and some expected changes by ISDA, the International Swaps Dealer Association. There are various new regulations and procedures to standardize the terms, the clearing, the disclosure around these businesses. That’s expected to increase costs and lower margins for the big players.
Q. And are these impacts broken out well in the disclosed financials of these banks, so investors have a clear view of what these changes mean?
A. In a word, no. The FICC businesses can be huge drivers of revenues and profits, but the disclosures are spotty and inconsistent. Profit margins, volume, capital costs, etc. are variable and poorly reported so its very difficult to get a bead on how exactly all the changes will affect their bottom lines… but the impact is probably meaningful.
Q. So, other than Morgan, who are we talking about?
A. BOA, Citi, Morgan Stanley, and Goldman are the big US players. But Barclays and RBS make a lot of money of their FICC groups, too.