An environment of sustained low interest rates and falling commissions for derivatives broking has compelled Newedge into a restructuring that it sees as a necessary step towards consolidating its business lines.
Its Asia-Pacific head, Laurent Cunin, says that the agency brokerage – a 50-50 joint-venture brokerage between Société Générale and Crédit Agricole CIB – is also grappling with a myriad of regulations impacting its business globally.
These range from tougher capital requirements under Basel III to stricter client asset segregation in the US and Europe, which mean that a revamp to shed non-core operations is required to meet rising compliance costs, the firm says.
Late last week Newedge announced it would split execution and clearing for futures and options into two distinct units as part of a restructuring that could see it withdraw from non-core businesses and markets.
The plans are subject to consultation with local employee representative bodies and regulatory approvals, which Cunin says would take at least three months.
He confirmed reports that job cuts would be required in an organisation with 3,000-plus staff globally, but refused to be more specific.
“The separation of voice execution from clearing is due to the two businesses’ distinctly different risk profile,” he tells AsianInvestor.
“By isolating the capital intensive clearing business from the little-risk, simpler execution business the group would be able to better allocate resources to these businesses.”
In Asia, Newedge is pinning its hopes on growth in its metals broking business in China.
Newedge has clearing membership on the Shanghai Futures exchange via a joint venture, Citic-Newedge. Only this October the firm made three new hires for its Hong Kong and Shanghai metals desk.
Cunin says metals is one area where the group will stay committed. But the fate of its other businesses in Asia including prime brokerage remains unclear. What the group may discontinue is still being discussed internally.
Licensed as a bank in markets such as Hong Kong and France, the agency brokerage stresses that it has seen the cost of doing business increase dramatically under Basel III.
It has had to set aside more capital to meet margin requirements for holding client money and collateral in its clearing business, and that’s eating into profit.
Further, increased scrutiny on segregation of client assets – a need heightened by the collapse of MF Global – means that brokers also no longer have the flexibility to re-invest some assets as they did in the past.
Instead, they must post all collateral in segregated accounts that some exchanges make available for investor protection.
The global nature of futures and options trading, combined with the extra-territorial impact from these reforms, has meant service providers in Asia are often caught between compliance of local jurisdictions and those in the US.
These new rules have compounded the challenges that agency brokerages have faced in recent years, and that in a world where the US federal funds rate has wallowed between 0-0.25% for months, with no end in sight.
“It is well known that interest-rate margins from reinvesting clients’ margin deposits during years such as 2006-08 was how a broker could make its bottom line, and the business operating costs were well covered by commissions,” says Cunin.
“But today, with negative real interest rates and commissions coming down, those days are gone. We need to reinvent our business model.”
He notes that while business volume from certain clients has gone up, the volume of derivatives trading has shrunk 15-30%.
In the US, Newedge is among the top three futures commission merchants based on client funds. In Asia, it is the top listed-derivatives broker by volume in execution and clearing on the Singapore Exchange, Tokyo Stock Exchange and the Osaka Securities Exchange, and second in execution on the Hong Kong exchange.
Cunin suggests that one way to stay competitive as the industry has become more commoditised is to provide ancillary services such as collateral management and over-the-counter derivatives clearing.
“This is how the brokerage business might evolve, and how we could add value to the service that we provide,” he notes.