As there have to be losers as well as winners, someone is bound to complain. And if last time is anything to go by, they will do so very loudly indeed.(Photograph omitted)(Graph omitted). Does HSBC’s decision to halt proprietary trading in the bond markets signal the end of the giddy days of expansion for the futures and options industry?
Many fingers other than HSBC’s have been burnt punting on interest rates, which is what bond speculation is all about. Swiss Bank Corporation’s results yesterday suggest it has also taken a bath.
Much of this business is done not in the cash markets but in derivatives, whose use grew at a phenomenal rate in the first half of this year – when the number of interest rate contracts traded worldwide on futures exchanges was three-quarters as high again as in the same period of 1993.That is without including the over- the-counter markets which were also booming but which are surrounded by impenetrable statistical fog. (The latest figures are a year old.)Certainly, Liffe, the London futures and options exchange, saw a sharp drop in trading in July compared with the frenetic activity in the spring, and on Monday this week it was right down in the doldrums. There is also anecdotal evidence that some traders have pulled back. (HSBC is not, however, a member.)On the other hand, Liffe’s July figures were still 35 per cent higher than a year earlier, and the first seven months of 1994 taken together were 85 per cent up.
Daniel Hodson, Liffe’s chief executive, says some firms will undoubtedly review their activities in derivatives after their experiences in the first half, and he suspects some will have reined back. But he puts the current retrenchment in the market down to seasonal factors and the relative scarcity of interesting economic news, compared with the spring.Indeed, in the short term, close observers report contrary factors at work: any firm that feels heavily exposed on its bond holdings is likely to be keener than ever to hedge its position in the derivatives markets. There could be a swing back towards hedging rather than speculation, especially after the latest Fed rate rise.But with many bank customers wary of derivatives because of the bad publicity, the hedge funds drawing in their horns and banks themselves taking a newly cautious line on their own holdings, it will be a considerable time before exponential growth returns to derivatives markets That should help to ease fears of looming disaster.. Like mortgage interest relief, married persons’ allowances and other tax breaks, profit-related pay is difficult to justify intellectually but hard to give up once you have had the pleasure of it. The idea has its roots in the argument made by the US economist Professor Martin Weitzman in 1984, that if an element of an employee’s pay is variable it helps to reduce unemployment and increase production. By feeling the financial effects of good and bad years, employees would become more focused on their company’s profitability.
Endorsed by the Wall Street Journal as ‘the best idea since Keynes’, it was introduced in the UK as PRP in 1987.
Accountants, who have benefited greatly by selling their expertise in introducing the schemes, like to insist that government support for it is based – as with those other tax breaks – on some notion of public good.But they admit that few companies opt for PRP with the intention of reducing unemployment They are much more concerned about controlling costs. And a system that enables them to provide staff with pay increases of up to 7.6 per cent at no cost to themselves has got to be welcomed.Just how powerful the tax incentive is can be gauged by looking at the take-up before March 1991, when employees could receive up to pounds 3,000 of their pay as PRP and receive tax relief on half of it. The Budget of that year more than doubled the benefit by raising the limit to the lower of 20 per cent of pay or pounds 4,000, and giving relief on all of it. The cost of this munificence to the Inland Revenue was pounds 300m in the last financial year.The attractions for the employee, on the other hand, are less obvious.