ICAP, the world’s largest interdealer broker, is reviewing its corporate structure, aiming to simplify its business into two distinct parts and get a firmer grip on its regulatory capital requirements.
The board wants to make a cleaner distinction between ICAP’s more profitable electronic businesses and its controversial Global Broking unit, which houses its brokers but is shrinking amid low market volatility, according to two people familiar with the situation.
The UK group also wants to rationalise its structure for regulatory capital requirements, which stand at about £500m across the business, as it extends a wide-ranging cost-cutting programme. A simpler organisational structure might pave the way to lower requirements.
The company declined to comment on Wednesday. Earlier this week it fired more than 100 brokers because of low trading volumes as part of a $60m cost-reduction plan.
ICAP’s move highlights how structural change is forcing interdealer brokers to take increasingly radical action. Low and steady global interest rates have curbed volatility and appetite for speculation, and trading of risk-offsetting products such as swaps. Broker-dealers, the mainstay of its business for 30 years, are deleveraging their balance sheets, while at the same time, sweeping US regulation is moving more over-the-counter derivatives trading on to transparent electronic platforms.
That has put pressure on ICAP’s earnings, where its broking business has a high cost base. As an interdealer broker, ICAP carries relatively little capital on its balance sheet compared with a bank.
To ease the pressure, Iain Torrens, ICAP finance director, has hired PwC to gather management-level data and conduct the review. It is hoping to have more information to present at ICAP’s annual meeting next month, the two people said.
The board wants to simplify the ties between ICAP’s electronic business and broking, which is at the centre of global regulatory investigations into alleged rigging of widely used market benchmarks.
The broking business has been charged by the European antitrust authorities for “facilitating” cartels to manipulate two Japanese currency-denominated benchmarks. US authorities are also examining ICAP’s role in the possible manipulation of Isdafix, a rate used by traders and banks to provide the average prices at which they would buy and sell benchmark swaps in major currencies.
Isdafix has been under investigation by the US Commodity Futures Trading Commission for a year, but no charges have been brought against companies or individuals.
The Global Broking unit also paid £55m in a settlement with UK and US regulators last September for manipulating Libor, while three former employees face trial.
By contrast, ICAP’s electronic business accounts for 69 cent of the group’s operating profits and is central to the company’s growth strategy. It encompasses trading venues such as BrokerTec, EBS and iSwap, its US Treasuries, foreign exchange and interest rate swaps platforms respectively.
It also contains post-trade services such as Traiana and TriOptima, which process trade data and OTC derivatives.
However the group has ruled out a full spin-off of the broking business, in part because of the links between the two units. For example banks can enter orders for ICAP’s iSwap electronic trading platform for OTC interest rate derivatives by computer, or they can be entered by an ICAP broker.
Shares in ICAP, down by nearly a fifth this year, closed down 0.9 per cent at 368p.
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