Global banks, Citigroup, Goldman Sachs and JPMorgan Chase have reported worrying double-digit declines in trading revenues. Michael Hewson, Senior Market Analyst at CMC Markets joined CNBC Africa from London to have an in-depth look at the environment that the banks are playing in. Barclays is another bank that has been in trouble lately with Dark Pool trading, in addition to discussing the status of global banks as they take the hit of substantial fines amid scrutiny from watchdogs, he simplifies the term ‘Dark Pool trading’ and shares what can be expected from banks going forward. – LF
MICHAEL HEWSON: Yeah, I mean, obviously there’s been an awful lot of publicity about Dark Pools, essentially Dark Pools are opaque trading platforms, which are essentially, done internally. Basically, it’s a mechanism whereby everyone can trade but no one actually sees the size of the order, how much is on the buy side? How much is on the sell side? Until well after the transaction has taken place. Now, it sounds very sinister but it is a very easy way for big institutions to move or adjust their portfolios in a manner that really doesn’t spook the market. In other words, push the market against them. It allows them to unwind large positions or wind up large positions across asset classes and across different sectors. Now, I think the crux of this particular problem is the fact that Barclays marketed this Dark Pool, as being totally opaque and free of what I would call high frequency traders. That, apparently, was not the case and that is what the U.S. Regulator is currently, looking at, at the moment.
ALEC HOGG: So there’s still quite a lot of water to run into that Dark Pool, no doubt, into the future. Michael, just again, from a South African perspective, I don’t know if you’ve been following the travails that Standard Bank has had in China, with commodities fraud. It’s cost 170 million Dollars for the bank.
MICHAEL HEWSON: That sounds quite, a small amount of money, when you consider the level of fines that are being, levied across the board for U.S. banks, U.K. banks, and European banks. With respect to miss-practices or mal-practices around interest rate fixing and other mortgage backed securities fraud, for example. I think, more than anything, I think this is endemic of what happens when you have a massive banking bust, after a massive banking boom. Regulators crack down on what the perceived mal-practices were and, essentially, you get a much-increased focus on where things may have gone wrong, so that they don’t go wrong in the future. Unfortunately, I think we’re going to get an awful lot more of that, as regulators pore over what’s happened over the past five/ten or 15-years and, as a result, well we saw that, I think, in City Group’s results earlier this week, where they were fined up to seven-billion Dollars on the back of mortgage backed security mal-practices. I think we still have quite some way to go. You mentioned Barclays Dark Pools, there’s also a Foreign Exchange probe, currently going on, and I think we’re just going to have to get used to the fact that we’re going to see, probably quite a lot more fines going forward, over the next three to six months. At the moment, there is a URIBL probe going on, in E.U. Authorities and, once again, they have accused a number of U.S. banks of fixing URIBL prices.
ALEC HOGG: So it is quite a risky place then, to be putting your money, despite some of the quarterly results that came out in the U.S. better than expectations. If there are more of these fines, as you’ve intimated will be the case, then there is uncertainty.
MICHAEL HEWSON: Absolutely, the banking sector has been one of those sectors that I steer clear from, simply for that very reason. There is also the fact that, particularly here in Europe, a lot of the banks, at the moment, are looking to bolster their balance sheets for this ECB Asset Quality Review, which is due at the end of this year. I think this really is a precursor for the European Central Bank, taking over as a regulator, for the European banking sector. What they want to do, essentially, is to find out, actually, the level of bad loans on these banks’ balance sheets, and a lot of these banks have actually been repatriating funds, back home, with a view to bolstering their balance sheets. Bolstering their capital ratios and that’s really one of the reasons why the Euro has actually been fairly, well supported over the course of the last year or so. It is essentially capital repatriation. Now, U.S. banks have actually, probably performed a little bit better, in year to date. Simply because I think, they got an awful lot of that heavy lifting, if you like, out of the way, with respect of the TARP Programme that they had in the U.S. We haven’t had anything like that here, in Europe. We had something similar to that in the U.K., which is why the U.K. banks are probably in better shape than the European banks, but as far as European banks are concerned, they have significantly, underperformed relative to the U.S. peers. Who are broadly, flat to slightly up, on the year to date so far.
ALEC HOGG: Well, some word of caution there from Michael Hewson, who’s a senior Market Analysis at CMC Markets. He was talking to us live, from London.
