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Foreign Exchange

Urgent update to Weekly FiX

It took a lot of persuasion but eventually I did it.

This was sneaked out under the noses of the guards at Deutsche Bank and at great danger to my mole. He was so scared, he took the image on his secret camera, aka mobile phone. So it's not the best image, but it's the best we could get. It shows Desktop Zar urging his troops on, although not in full foot stomping mode, which I hear, is another one of the images. I hear that the troops at Deutsche are relieved today is the last FX Poll votes can be cast. They are looking forward to not having to listen to their illustrious leader each time they turn their computers on.


You don’t get nuffing for nuffing

They used to say in the FX market that what you got paid was highly correlated to what you achieved in terms of revenue generation. It’s always struck me as a false claim, one that is completely at odds with the guaranteed bonus culture that has taken hold over the past couple of decades.


Years ago, when I was at Nomura, we were desperate for a spot dollar/yen dealer. My boss, the great Tom Elliot, identified a ‘Billy big dog’ who apparently met our needs and arranged to meet him at some swanky restaurant in Chelsea. When Tom arrived, ‘Billy’ was already there. Tom ordered a gin and tonic and before he had barely taken a sip, Billy put his cards on the table: “I’ll come round if you give me this, that and the other.” Tom replied: “I’ll give you all of that, if you make me this every year.”

Billy’s jaw dropped. “I’m not guaranteeing that,” he spluttered. At which point, Tom asked for the bill from the waiter.

“What are you doing? We’ve not even ordered yet,” Billy gasped.

“It’s bad enough you wasting my time, but I’ll be f**ked if you’re going to waste my money as well,” was the gist of Tom’s response as he got up and left.

Guarantees are fine, but they should work both ways. Recently, I’ve heard of bonuses paid to dealers who had terrible years and prop traders turning down hedge fund jobs because they pay on results only. It’s not as if base salaries put traders on the poverty line, but it seems nobody, at least on the sell side, is prepared to make a stand and say the present bonus system is out of control. I cannot see how a guaranteed bonus acts as an incentive. Anyone with even a basic level of psychology will tell you that, long term, intrinsic motivation is far more powerful than extrinsic. What banks should do is engender a sense of pride in their dealers if they achieve their true potential.

Oh, and pigs might fly.

FX temps

The transfer season is well and truly in full swing (see People moves). Certain institutions are facing a tough time maintaining staff levels and it must be hard planning for the year ahead when there is a risk that entire teams will head off to where the grass is greener.

The problem is being compounded by a shortage of quality traders. I jokingly suggested to one mucker that he lure my wife out of retirement to help him solve his immediate problems. I was thinking of setting up a recruitment company called Pimp my wife, but my wife – not surprisingly – vetoed that name straight away. However, she’s not against the idea in principal. She was a cracking options trader in her day, so I reckon I could be on to a winner.

I ran the concept past two other acquaintances. I was astonished when one of them said that the bank he works at is seriously considering employing temporary dealers. Another said that when his firm set up its FX desks, it did so with two traders on short-term consultancy contracts. They were both known as reliable, safe hands who were able to manage risk and get the business up and running.

There is undoubtedly a talent pool out there of successful traders who no longer want to participate fully in the macho FX environment that stupidly demands needlessly long hours. But they could still offer a lot. It’s not unheard of re-employing sales staff after maternity leave to work reduced shifts, but it seems that doing so in the trading arena is, for the moment, a step too far. My view is that banks are turning away a lot of talent as a result.

Retail punters, aka reverse barometers

When I used to report on equities, a lot of my best predictions were as a result of trawling around internet bulletin boards. I noticed that once the mug punters start getting into something, it was almost invariably the top of the market. Back in November I was sent an email alerting me to the fact that US retail investors were able to invest in Deutsche Bank’s Currency harvest index. “US investors can now buy the carry trade... very, very scary. More evidence of the disaster that has to come,” was the warning I received.

Now the timing in this instance was out by a few months – far too long in market terms – and the carry trade unwinding has not, so far, led to any disasters. Over the last month I have read a lot of comments on boards about the benefits of investing in high yielders, which were posted at broadly the same time as many started to predict the market was becoming over exposed.

I get the impression that most banks have done well enough, embracing the return of some volatility. On the flipside, I think a lot’s been given back by the investment community. Perhaps they should have kept an eye on the bulletin boards and what the mug punters were putting on.

HSBC

What a week it’s been for HSBC. On Monday, the bank presented its final 2006 results, which included the news it was writing off $10.5 billion in bad loan provisions. Most of this stemmed from the bank’s sub-prime US mortgage business. Prior to the figures, HSBC apparently issued its first ever profit warning – though some of its constituent parts must have done that in the past. Those of us with not too long memories will remember the trouble that Midland Bank, once the largest bank in the world and now part of the “world’s local bank”, got itself into when it bought Crocker and its disastrous Californian mortgage book back in the 1980s. ‘Crocker shit’, as we swiftly named it, brought the once mighty Midi to its knees.

Apparently, there’s no such danger of this happening at HSBC, which can easily absorb the loss; I wonder if my bank manager will be so accommodating when I ask him if he’ll write off my five-grand overdraft as casually.

Anyway, talking about ‘divis’ – London slang for people not blessed with resounding intellect – HSBC outlined the details of the dividend it will pay to its shareholders this quarter. HSBC accounts in dollars, but a vast chunk of its shareholders reside in the UK or Hong Kong. So it has to convert dollars into sterling and HK$ to pay them. Readers of the magazine will know that I’m not a fan of the way the bank does this – see ‘Transparently stupid’ Euromoney, June 2006.

This quarter’s dividend amounts to $4.1 billion and will be paid to shareholders on May 10. Of course, some shareholders reside in the US, and some will take a scrip, but there’s still a big cable deal coming up. This will be done “at or about 11am on April 30, 2007”. I do actually feel sorry for my old mates at the bank. Cable will inevitably go bid as the market front runs the order and the bank will struggle to get a good execution. Shareholders, me included, will get a rubbish fill, and HSBC will get another slagging off in this column.

I notice on HSBC’s website that it: “is recognised as a market leader in foreign exchange derivatives globally.” Among the services it delivers are, “full risk management services and flexible hedging solutions to our global corporate client base through currency option products ranging from vanilla options to highly tailored solutions.” Strange it can’t come up with a strategy to hedge its shareholders’ dividend then.

It’s a funny old world FX.

Naturally I got on to Andrew Brown, the bank’s global head of FX offering a suggestion. Why not do a forward extra, I asked, hedging the position at 1.9260 at worst, with a knock-in trigger at 1.8600. According to SuperDerivatives, this would only cost 0.44% of the notional amount, probably little more than the money HSBC spunked away lending to US pondlife and with the benefit of having some upside potential. Of course, there would be a bit of a problem if cable fell below 1.8600, but you’ve got to be in it to win it.

Brown pointed out that it’s not that simple. Poor old HSBC is damned if it does and damned if it doesn’t. Quite why it does the transaction in such a stupid manner is still beyond me and I wonder if it will change its policy after MiFID is introduced – after all, this is a securities related transaction and in theory the bank will have to prove best execution. My bet is that some silly old buffer on the board once decreed the bank must be transparent. The only flexibility HSBC does have is that it is no longer committed to doing the transaction at a specific time on April 30. That may deter the market from getting too long of cable, but it probably won’t.

Finally, the affable Ben Welsh resigned from HSBC NY on Tuesday (see People moves). I managed to get hold of this story very early because I called Ben completely by mistake as he was clearing his desk. “Are you calling about me?” he asked. “I am actually,” I replied. “What’s going on?” Why be good if you can be lucky, as Tom Elliot always told me.

Looking for a Fox

Bank of America has seen quite a few staff go this week, so I got in touch via email with Chris Mandell, its global head of FX, to see if it was, as one source claimed, “shedding staff globally.”

Anyway, I went through the ‘proper’ channels and included Melissa Fox, vice-president of corporate communications. Chris replied to me promptly and to Melissa Fox. Shortly after, I got an email from Melissa that seemed to have little relevance to those already sent.

All was explained this morning, when I got an email from another Melissa Fox, this time a new recruit on MBNA’s customer services desk in California. For those unaware, MBNA is now part of BoA, as the cringe worthy clip shows. If I had to go to such functions, I’d be on my toes as well.

People moves

For premium subscribers only. People moves: HSBC, BoA, Credit Suisse, JPMorgan, Vega EM, Standard Chartered...



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  Lee Oliver can be contacted at fx@euromoney.com.           
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