Swiss finance plays down impact of Obama rules

The new measures banning 'prop trading' in US institutions, packaged for the public as "the Volcker Rule", after the 82-year-old economic recovery advisory board chairman Paul Volcker, put the wind up bankers at the World Economic Forum annual meeting in Davos.

Another regulator suggested to reporters at Davos that there need not be an outright ban on proprietary trading, but that there should be a cap on the percentage of business it represented.

Either way it does not bode well for traders in US banks who currently have access to huge institutional credit lines and market networks.

Industry commentators suggest that commodity traders have been moving out of investment banks into trading houses to escape the growing regulatory scrutiny. Swiss traders such as Trafigura, Vitol and Glencore are cited as the beneficiaries from the so-called exodus of traders from Wall Street.

"It’s a great story in the paper," says Vitol spokesperson, Mark Ware, but he thinks the hype is overblown. People often move between banks and trading houses and Vitol sees no sudden surge of applications from US finance.

Investment banks have been key players in the commodity space since the likes of John Shapiro at Morgan Stanley developed operations rivalling those of raw materials companies in the late 1980s.

To lose key metal, energy and grain trading functions will lead to a "shake-up in the commodity order" according to reports quoting unnamed executives, who predict an increase in market share for big energy traders based in Geneva, Lausanne and Zug.

Obama’s proposals are in their infancy but political interest in banks with large commodity positions has already caused a stir throughout the industry.

To counter scrutiny, banking behemoth Citigroup sold its publicity-shy commodity group Phibro before Christmas for around 250 million dollars to petroleum company Occidental. Over the past five years traders made 371 million dollars annually for Citigroup.

The US Commodity Futures Trading Commission has long talked about moving to prevent speculators manipulating energy markets.

"Our view is it will have no impact for us," said Patrick Prendergast, spokesperson for Mercuria, the fast-growing multi-energy trader based in Geneva.

"It might be beneficial for the market as no one will be able to have very large positions," said Prendergast.

Swiss banks have prop trading functions and Credit Suisse has become increasingly active in commodity markets. But it is not yet clear how new rules will affect foreign-based institutions present in US markets. At its most recent investor day, UBS tried to play-up its “client-centric business model”, possibly to avert attention from prop trading functions.

A Zurich-based executive from a large global securities brokerage told Swisster that most trading houses in Switzerland cannot offer trading limits of the same ilk used by US investment banks.

A big bank can stake a huge pot of cash for savvy traders to use playing the market, with half an eye on a large bonus at the end of the year. Some Swiss trading houses are less alluring as they cannot offer a trading desk on the same scale.

"Proprietary trading? I don’t see that happening here in Switzerland," at least not amongst boutique trading houses, said the broker. "It could make sense for hedge fund managers," he added.

Traders could leave banks to start new fund operations in the Alps, according to industry sources.

"If we take a step towards separation one would think we would see a few more teams starting up like hedge funds. I would expect to see more of those created," said Olivier Jakob of Zug-based Petromatrix, to Reuters.

The banking break-up proposals could create welcome opportunities for the global hedge fund industry, according to a statement by industry body AIMA.

The Obama regulations could create more dominant positions for Swiss-based funds, or cause a talent flow across the Atlantic.

However "the specifics are not yet clear". said AIMA president Andrew Baker.

Swiss finance is moreover focused on EU regulatory developments and domestic issues, said Hannes Glaus, a lawyer with Lustenberger Glaus who is involved with three major Swiss finance and fund management associations.

The proposals are "not very certain and highly speculative," said Glaus. "At this stage it really hasn’t attracted us to a degree that we’ve discussed it in SECA," – the Swiss Private Equity and Corporate Finance Association – added Glaus.