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Barclays Capital and J.P. Morgan top US fixed income trading study

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Barclays Capital and J.P.

Barclays Capital and J.P. Morgan have emerged from a year of historic crisis as the leaders in US fixed income trading as a host of regional and foreign dealers capitalized on bulge bracket disruptions to build new ties with US institutions, according to a study by Greenwich Associates.

Barclays Capital and J.P. Morgan claimed the title of co-leaders in US fixed income in terms of both market share in secondary trading and overall franchise quality in the Greenwich Associates 2009 US Fixed-Income Investors Study.

In addition, Barclays Capital notched the biggest improvement in client ratings of relationship strength from 2008 to 2009 despite the challenging Lehman Brothers integration.

"The success of Barclays Capital over the past 12 months is particularly impressive given the timing of their acquisition of the Lehman Brothers business and scope of the integration it required," says Greenwich Associates consultant Frank Feenstra. "Also worthy of note has been Citigroup’s dramatic expansion of its market share and the significant gains made by Deutsche Bank and Credit Suisse."

Greenwich Associates consultant Tim Sangston says the past year has brought more change to US fixed-income than any 12-month period in the 37 years that Greenwich Associates has been covering this market.

"In addition to the demise of several storied firms, our research shows that the crisis has altered – in some cases dramatically – the way institutions interact with their fixed-income dealers. The firms that managed to best navigate these storms have been reaping the rewards so far in 2009 in the form of strong performance in FICC," he says.

For the first time in more than a decade, the number of fixed income dealers used by the typical US institution fell by a meaningful amount from 2008 to 2009. The primary driver of that decline was the consolidation among major dealers, as most US institutions had trading relationships with one or more dealers that ceased to exist during the crisis. However, the results of the study suggest that institutions were also proactively cutting back on dealer rosters due to concerns about heightened counterparty risk.

Approximately one-third of US institutions say they reduced the number of dealers with whom they trade fixed-income over the past year. Thirty-seven per cent say they shifted trading volume to dealers perceived as having the least counterparty risk. Another 27 per cent say they reduced the concentration of trading business they do with any one dealer, presumably as a means of managing counterparty risk by limiting exposure to individual firms.

Although institutions as a group reduced the number of dealers used for fixed income trading, many individual institutions that suddenly found gaps in their coverage due to dealer consolidation sought out replacements.

These dislocations have created new opportunities for a range of regional dealers and other competitors. Following the abrupt disappearance of Bear Stearns, Lehman Brothers and Merrill Lynch, and the pull-back of many other major dealers from their roles as fixed income liquidity providers, firms like Cantor Fitzgerald, Jefferies, FTN Financial, Morgan Keegan, Raymond James, and foreign dealers including BNP Paribas, Mizuho Securities, Nomura and have won new trading relationships with US institutions. Thirty-six per cent of US institutions say they increased the amount of trading business they do with regional dealers in the 12 months covered in the Greenwich Associates research.

"Some of the regional US dealers have moved quickly to capitalize on the troubles of bulge bracket firms with aggressive hiring in fixed income," says Greenwich Associates consultant Peter D’Amario. "Although these moves have not yet paid off in terms of increased trading market share, these firms are being added to institutions’ lists of dealers and they are laying the foundation for what could be significant expansions of their franchises in months to come."

Several of these firms – most notably BNP Paribas, Cantor Fitzgerald, Jefferies, and Mizuho Securities – achieved significant improvements in client ratings of relationship strength.

However, the study says it is an open question as to whether regional dealers will be able to retain the momentum they established during the crisis and its immediate aftermath in the face of inevitable competition from major dealers able to put their much larger balance sheets in the service of the largest institutional clients.

"In addition to the market penetration gains among regional and selected foreign competitors, we are also seeing significant gains in trading market share among global banks other than Barclays Capital and J.P. Morgan," says Greenwich Associates consultant Woody Canaday.

In general, the research results suggest that dealers who remained committed to individual fixed income products and trading clients are now reaping the benefits. A prime example is Citigroup, which has demonstrated renewed commitment to customer trading in general and specifically to rates or "flow" business in US Treasuries, agency securities, swaps, and MBS pass-throughs, while also expanding its presence in electronic trading.

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