RBS to wind down part of swaps clearing unit

Royal Bank of Scotland is to wind down part of its interest-rates business as rising regulatory costs squeeze the unit’s profitability.

Staff learnt of the bank’s plans to reduce both its rates prime broking and over-the-counter clearing businesses last week, and customers were informed on Friday.

The move marks a further retreat from investment banking services, as the UK-government controlled lender continues to deleverage its balance sheet and boost its capital ratio.

RBS will also call time on a four-year push to improve the competitive position of its interest rates business – which had aimed to exploit new rules around OTC derivatives trading and take on rivals such as Morgan Stanley and JPMorgan. Three years ago, RBS merged its OTC derivatives clearing unit with its futures business to offer a more integrated service to customers. However, it has struggled to build a large-scale business. The bank will retain its foreign exchange and exchange-traded derivatives prime brokerage services. The phase out of outstanding positions is expected to take from 3-8 months.

In a statement on Sunday explaining its decision, RBS cited the “increasing level of capital, operating costs and investment that would be required for our business to be globally competitive in a market with extremely thin margins”.

RBS follows Barclays in scaling back its operations in investment banking amid a sharp downturn in global fixed income trading.

Once a profit centre for many banks, fixed income trading has been hit by slow global economic growth and low and stable interest rates, which have damped investor appetite for risk-offsetting products.

At the same time policy makers are forcing banks, institutional investors and hedge funds to use clearing houses when trading OTC derivatives in the wake of the financial crisis.

A clearing house stands between two parties in a trade, ensuring a deal is completed in the event of a default. This has also made the industry more capital-intensive, since users must post collateral, or insurance, for trading.

A third problem banks face are requirements to comply with more stringent rules about using their balance sheets to support derivatives trading, potentially limiting the services smaller or less profitable customers will receive.

www.ft.com/tradingroom

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This article is subject to a clarification and has been amended.