Banks look to invest in FX again as scandals fade

By Patrick Graham

LONDON, April 29 (Reuters) - After two years of scandal, jobcuts and regulatory upheaval, there are signs that banks areready to invest again in one of their biggest cash cows, foreignexchange trading.

First-quarter results from leading banks show all tradingstruggling to reach the 12-13 percent return on equity theindustry expects.

But after a volatile six months, and with negative interestrates crushing returns elsewhere, they also suggest foreignexchange is the best of the bunch.

Senior managers with major players in the currency marketsay they are prepared to hire after two years of paralysis inwhich 38 of the most experienced traders were suspended.

But they also say new investment is likely to focus ondealing with a new regulatory approach and expanding themachine-driven trading which now accounts for 90 percent ofbusiness.

Mike Goggin, an ex-trader and broker whose firm Brookleighrecruits dealers and other foreign exchange staff for severaltop 20 banks, says bonuses for most FX traders have fallen by 50percent or more in the last few years.

He says the return of volatility since the middle of lastyear has encouraged banks' FX managers, although the shock ofthe Swiss franc's move on Jan. 15 has led most to rewrite 2015business plans.

"Bonuses undoubtedly have come down," he says. "Whereas inthe past some dealers would be expecting total remuneration of5-10 percent or possibly more of annual trading profit and loss,it's now more like 2.5 percent or even less."

That means a senior trader who brings in revenue worth $25million-$30 million for a bank and might have expected to earn$1.5 million in the past, is looking at $700,000-$800,000. Whilethat shift looks to have bottomed out, it has made base salarymore important and made it harder for senior people to move.

"I don't think anyone will be hiring aggressively, but youare seeing some more movement now," said a source at one of thetop five currency trading banks.

"Headcount has been cut substantially and there is probablyroom for banks to do more after the year we've had."

AUTOMATION

Two departures from Deutsche Bank are among a handful ofrecent high-profile moves among traders, but recruiters say mostin demand are compliance and regulatory officers, electronictrading experts, mathematicians and programmers.

The chaotic market response to the Swiss central banklifting its cap on the franc has prompted some big clients toask for more personal supervision of their positions.

But "what the franc trade said to me is that they haven'tgot it right and you need to put more money into automation,"said Peter Jerrom, previously head of global options trading forUnicredit, and now running a derivatives business for Londonbrokerage Sigma.

"You need deep pockets to do that and we're probably goingto see the top guys continuing to pull away."

The biggest names in forex by far are Citi, DeutscheBank and Barclays, controlling around halfthe market, followed by JP Morgan, HSBC, UBS and Bank of America Merrill Lynch.

JPMorgan equity analysts estimate that this reporting seasonwill show revenue from Fixed Income, Currency and Commodity(FICC) trading rising 9 percent year on year with FX as the bestperformer thanks to a 30 percent rise in volatility.

Bank of America, reporting this month, said its currencybusiness recorded its best revenues since it acquired MerrillLynch in 2009 and Barclays on Wednesday reported a 13 percentrise in its Macro trading segment.

The head of FX trading at another top five bank, speaking oncondition of anonymity, told Reuters his bank and others wereprepared to invest more capital, chiefly in greater allocationsto currencies of balance sheet risk.

"We've had 9 months of tremendous growth of volumes andclient activity," he said. "FX as an asset class is a bullmarket investment again." (Editing by Nigel Stephenson/Ruth Pitchford)