London, 29 January 2010

US moves to stop banks speculating in financial markets on their own account are likely to spawn a host of new independent commodities houses as banks sell trading units and as dealers leave to set up on their own.

Banks and trading companies say the plans flagged last week by the administration of President Barack Obama will almost certainly take more than a year to enact, and they suggest the eventual legislation may not be as tough on banks as expected.

But the proposals look set to have a global impact on banking operations, affecting European and Asian institutions as well as the big three US banks: Goldman Sachs, Morgan Stanley and JP Morgan Chase.

And, together with government campaigns against bank bonuses, they are sending a clear message to the financial markets that the best money in future is likely to be made by independent traders and hedge funds and not in the banks.

"The announcement must have increased the stock of the big oil company trading groups and independent oil traders," said Philip Wiper, director of PVM, the world's largest over-the-counter (OTC) oil broker. "They will not only see some advantages removed from the banking competition, but also must have found it easier to recruit real talent from the first moment when there was a whiff of curbing banking bonuses in the air," Wiper said.

Flatter Playing Field

Independent traders have long complained they can be at a disadvantage when competing with banks in some markets. Removing trading units from banks, either via sale or other arms-length arrangements, will take away this edge and force all traders to compete for capital, arranging letters of credit and insurance on more equal terms.

"The playing field is likely to be flatter after any market adjustments to prepare for the new legislation, with hived-off prop(rietary) trading units not being able to rely on access to either huge amounts of capital or customer flow," Wiper said.

The Obama proposals come at an unfortunate time for JP Morgan, on the brink of buying RBS Sempra Commodities for an estimated $4 billion and other banks that have expanded their presence in the sector, such as Credit Suisse.

But they could be good news for hedge funds and independent traders, especially those that are relatively sheltered from government scrutiny, and give added impetus to a recent trend.

Last year, a wave of traders left banks to work in trading houses, including Trafigura, Mercuria and Gunvor. Singapore-listed Noble Group opened oil and products trading desks in London and Connecticut last year, hiring 20 to 30 energy traders, several of whom came from Morgan Stanley.

Slow Crawl

Edward Meir, senior commodity analyst at brokers MF Global in Connecticut, said the move out of banks could take time to pick up momentum, but was likely to be significant.

"It is going to be more of a slow crawl rather than a huge, mass exit," he said. "Certainly the guy who has got his bonus and who has no reason to hang around will probably leave."

"I hear talk of traders leaving. But most people so far seem to be staying put. There hasn't been a stampede yet," he added. Bank employment offers clear benefits such as security and pensions, which are not guaranteed in a hedge fund or trader.

"If you go to a hedge fund and don't raise capital within a certain period of time, you are toast," said Meir.

"Also things are still up in the air. People don't want to leave because maybe they think they will see what the legislation is. Maybe it will be watered down."

The global head of commodities at Societe Generale, Frederic Lasserre, saw no legislation for some time.

"It is going to take time before we get a bill that will pass through Congress and then be implemented," Lasserre said.

A spokeswoman for one major oil company, who declined to be identified, said she expected U.S. banks to hire lobbyists and lawyers to delay or dilute the Obama plans: "We expect a big payday for lobbyists campaigning for the status quo."

Olivier Jakob, at Petromatrix in the Swiss canton of Zug, popular with commodities traders such as Glencore, said he expected most banks to be affected and many to lose staff: "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."

Ends --

By Emma Farge and Christopher Johnson, Reuters - for Commodities Now