FOR a President that promised hope not fear, Barack Obama is happy to spook the markets. Last week, the CBOE volatility index – Wall Street’s fear gauge – surged by 62 per cent to close Friday at 27.31, its biggest run in three years. It’s not just the war on banks that has investors running scared: new rules on energy trading are also leading to uncertainty.
Of the British banks, Barclays Capital is most exposed to a ban on proprietary trading in the US.
That said, last week’s sell-off was overdone; according to analysts at UBS, prop trading will account for just 4.2 per cent of Barclays’ revenues this year. New capital requirements would also ease if it were to scale back these activities, meaning the effect on profit would be mitigated.
Because investment bankers are big users of inter-dealer brokers, Tullet Prebon, ICAP and BGC Partners could be hurt by Obama’s proposals. However, industry sources say that pure prop trading, where banks speculate with their own money, has become less common since the financial crisis.
It’s also likely that hedge funds would step in and take the place of banks’ prop traders, meaning firms like Man Group could benefit from the US crackdown. If they don’t, and trading volumes fall, the London Stock Exchange would be hurt.
Banks also fear moves by the US commodity regulator that will clamp down on energy trading.
When the CTFC’s plans first emerged, traders thought they had got off lightly; although there will be a cap on the number of futures contracts large traders can hold, there will be hedging exemptions designed to protect energy companies from volatile fuel prices.
Those traders that take up the exemption won’t be able to take any speculative positions in oil or gas, however, making the legislation far more draconian than first thought – bad news for BarCap, Goldman Sachs, Morgan Stanley and JPMorgan.