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On one level, Icap's figures this week demonstrated its resilience in the face of the global financial storm but on a deeper and more interesting level they told a different story.
The evolution of the business provides clear evidence of how the structure of the over-the-counter and derivatives markets are changing before our eyes. This is not the result of regulatory or legislative changes, because politicians and regulators are still working out what should be done. Instead, rather than wait for the result of the debates, the market is moving on of its own accord. Having stared death in the face, the industry is changing to make the OTC world a safer, more resilient and efficient place. Reforms that might otherwise have taken years to negotiate are coming through in a matter of months.
Icap sees money in this space, as it spelled out in the statement with its half-time figures. Most people still think of it as a voice broker, one of the biggest in the world acting as the middle man between firms seeking to buy and sell complex derivative products that are too specific to the needs of one firm or client to be easily traded on an exchange. This remains a huge business but Icap is spreading out. Its ambition now is to be the leading global intermediary and the leading post-trade services provider in these markets. It expects an even three-way split in its profits — from voice and electronic trading and post-trade services.
That is a huge shift. Five years ago, Icap was only a voice broker. Today, that business accounts for little more than half its profits. This shift has happened not because voice broking has declined but because other areas have grown: first the electronic trading platforms of BrokerTec and EBS and then — starting last year when it bought an interest in Reset and Traiana — the entry into post-trade services.
In the wake of the crash, there has been great emphasis on measures to get more OTC products to go through clearing houses as a way to reduce counterparty risk. This is generally considered to be a good idea, though it does raise the question of whether the clearing houses will then themselves become organisations that are too big to fail. Nor will it be able to solve all the problems because not all derivatives will be suitable for clearing.
But what this underlines is the need for better and more timely information, so participants can manage their risks better and this is what post-trade services provide. Essentially, it is building a post-trade information warehouse to help mitigate the back-office strains that arise from high-frequency trading; and to help firms manage their counterparty risk and net off positions with others so they can cut the use of capital.
Furthermore, it sees a huge market in supplying the information it generates to the different players in the trading chain for compliance, risk management and valuation.
It is a cliché to say crises present opportunities, but they do. The ability and willingness of financial firms to grab those opportunities rather than dwell on what has been lost in the crash is one very good reason to remain confident about the City as a global financial centre.
Fraud flaw in pay bonanzas
The flaws in performance pay have been catalogued here from time to time, particularly the way executives appear to fix the system so they always get a prize, and how the shift to performance pay and the vastly increased amounts paid to executives in the past 15 years seem not to have delivered any noticeable improvement in companies' long-term performance.
But there is something else. Today sees the publication of the Global Economic Crime Survey, a report compiled every year by PricewaterhouseCoopers, and it not surprisingly finds that fraud and suchlike are increasing as the recession tightens. That is no real surprise though. The insurance industry has long known that bad times inspire more dubious claims.
What is new is the finding that firms where the top people are very heavily incentivised are more prone to fraud than those which have more equitable pay scales.
One could understand — though obviously not condone — this if it were the top people tweaking the numbers so they hit otherwise unattainable targets, but this is not the problem.
Rather, it is their underlings in the ranks of middle management who are significantly more likely to be on the take. There appears to be a cultural backlash in those organisations where a few people earn vastly more than everyone else and where because of a sense of unfairness or resentment, they feel more justified in dipping their hand in the till. The boss is helping himself to excessive amounts, so they have fewer qualms about having a little extra themselves.
