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Look back with anger, look forward with rage

It’s incredible that 12 months ago I was writing about how 2008 had been a bad year to have a good year. From where I sit, it doesn’t look like 2009 has been much better. Even though volumes have dropped this year – the consensus is that turnover is down around 30% – FX has continued to remain a profitable business for many.

Sell side improvements: Don’t look back in anger

And yet there is a real sense that the FX market will be punished for its role – or rather its non-role – in the sub-prime crisis. The issue of bankers’ bonuses is one example, but the threat of increased regulation is far more relevant. Few would disagree that the FX market functioned incredibly well throughout the worst of the difficulties that unfolded in 2008 and continued in 2009. That is solid testimony to the market and to the professionalism of those who work in it and have shaped its structure. It is no wonder so many question the motivation of those who seem determined to fix something that ain’t broke.

As for bonuses, in the real world if the company you work for goes bust, you lose your job, usually without receiving a penny. So, it is no surprise that Joe Public feels aggrieved that traders working for what are effectively bankrupt banks have not only continued to be well paid – certainly in comparison with most of the population – but are now in line for bonuses just a few months after he as a taxpayer bailed out their banks.

It doesn’t help that the financial community has managed to score some spectacular own goals. Take the case of RBS. Back at the start of the summer, the buzz coming out of the bank was that the UK government had told its board to run it as a proper business but not to embarrass it. The implication was clear: Pay good staff a competitive salary, but don’t generate any negative headlines. So what did RBS do? It hired Antonio Polverino from Merrill Lynch on a reported guaranteed annual salary of £7 million.

What a spectacular example of RBS shooting itself in the foot, especially when some of the people who played such a role in building up the bank’s FX business subsequently decided they didn’t want to work within Polverino’s new regime.

Predictions for 2010

There’s no point looking back with anger, though there are few reasons to be cheerful when looking ahead either.


Forget market moves; regulatory and tax arbitrage will be the two biggest themes of 2010. The US will impose draconian and ill-thought-through measures on the financial markets just as it did in the 1960s when the offshore Eurodollar market emerged. The coming year will see the emergence of offshore USD trading as the FX market seeks to maintain its reputation and flexibility.


Until recently, London, or rather the City, would have been the most likely beneficiary. But the actions of an exhausted UK government, which also believes there is global consensus for regulatory and legislative clampdown on financial markets, sees Paris gain at London’s expense. Despite the rhetoric, the French president demonstrates a solid grasp of political chicanery.


While agreeing to everything publicly, privately France invokes action plan seven of Paris Europlace’s charter, which states that the city is dedicated to “improving the tax and regulatory environment.” With Geneva overflowing, thousands of bankers start a weekly commute to the French capital from London. In September, Nicolas Sarkozy rings the UK prime minister. “Comment tu restes, shag?” he enquires. It has become clear he didn’t really mean it when he promised to cap bankers’ pay.


Meanwhile, CME Clearing makes it clear [a bad pun, but it’s my column] that fungibility is a bad word. Exasperated, Japan, China, India and the rest of the eurozone support French efforts to create an offshore FX market.


In October, as the exodus from London gathers pace, The Specials re-release their 1981 hit about urban blight – Ghost Town – with new lyrics:


This town, is coming like a ghost town

All the banks have been closed down

This place, is coming like a ghost town

Dealers won’t deal no more

Too much taxing by the Chancellor

Elsewhere, the bastard child of the credit derivatives market thrives. Encouraged by the use of a central clearer and its supposed removal of counterparty risk, a new wave of reckless dealing begins. The regulators fail to notice, and in 2011 the market blows up spectacularly. Unfortunately, the huge concentration of risk at CME Clearing means the collapse of the entire financial system, except for FX, which sensibly moved offshore.


As 2011 comes to a close, FX traders around the world are heard muttering about what a bad year it is to have a good year. They wait in vain to receive their bonuses while a wave of civil unrest unfolds. Gold goes temporarily bid, but soon the best asset to be long of becomes a pump-action shotgun.

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