FX Changes Require Revised Hiring Strategies
The recent furore around not only the free-fall of the Chinese and Asian stock markets but also the continued drop in oil prices has brought into sharp focus concerns about another global recession. Global markets took a real beating in January as Brent Crude prices dropped below $30 a barrel. The continued pessimism in the market was also supported by economic data out of the US showing industrial production and retail sales were weaker than anticipated. To add to this the lifting of sanctions on Iran has put further downward pressure on oil prices.
The collective impact is reshaping the global banking landscape. As for Foreign Exchange markets, the market volatility appears to have been a key driver for FX revenue, making it the top performing business line for the majority of banks. According to research that we have recently undertaken at BHA with 400 banking professionals, G10 FX businesses at banks increased by more than two-thirds in the first half of 2015 compared to the corresponding period in 2014.
The changes in the market structure over the last year has had a significant impact on recruitment and hiring plans of market participants as well as the compensation packages of many FX professionals.
Factors such as regulatory change, new technological advancements, and an increase in non-dealer market share have all had an impact on UK FX in 2015. This has been reflected in the fortunes of market leading institutions in the interbank FX sector who have experienced lower trading volumes in 2015, all of which has led to many revising their hiring strategies for 2016. According to research from Greenwich Associates, year-on-year market shares of the five biggest banks in Foreign Exchange shrank. Barclays, JP Morgan, Citi, Deutsche Bank and UBS all witnessed their market shares decline by 2% as a result of changes to the market structure. Smaller participants have been able to gain ground due to advancements in technology.
Compensation has been a hot topic for FX professionals given that onuses are down this year. This decrease is not only related to the fines banks have had to pay or poor trading performance in 2015. The changes announced by the Prudential Regulation Authority in 2014, which require banks to ensure that they can claw back and defer variable remuneration for staff that are subject to the remuneration code, has resulted in shrinking bonuses and increased salaries for many bankers. It has significantly increased fixed costs at a time when that Banks are focused on cost reduction. Code Staff in particular have been heavily impacted, dis-satisfaction is high, given that up to 60% of the variable is deferred. There is an understanding of the rationale behind the changes, however the stark reality is something bankers are still struggling to come to terms with. The impact has largely been dependent on seniority and business activity. For example, G10 FX Traders are less impacted and expect to be paid well given their strong performance in 2015 where revenues rose 60% YoY
Technology was the second biggest cause for concern and factor driving change as many banks implement more efficient and streamlined e-trading platforms. Again our research showed that electronic trading now represents up to 70% of daily turnover in the FX markets. However, the knock on effect of this is that staff cuts are being made and the shift towards e-trading has significantly changed the profile of FX market professionals and the way that FX is traded.
Other technology such as blockchain is threatening to revolutionise the way trading is undertaken. Many banks are starting to invest in this technology and are looking at how it could reshape their business model and cut costs.
As we look ahead into 2016, although macro market volatility will undoubtedly benefit the FX market, all the changes I’ve outlined above will also create significant disruption, change and instability for FX professionals. This will undoubtedly result in many of the banks adopting a different approach to their hiring strategies. The most likely outcome is the old guard being phased out as more switched on and tech-savvy millennials and Gen Z employees start to flood the market. Equally, with changes to compensation plans and continued cost cutting, banks face stiff competition and the likelihood of staff being poached by hedge funds and technology firms.
Strategies for hiring and retaining staff amidst this volatility will be critical to the ongoing success of banks, particularly in the FX market. Key considerations are: What are the qualities that the new FX professional will need to have? How do banks recruit the right emerging talent? Equally how do they ensure that they help more established and senior staff realign themselves to an evolving market place? How do they put in place compensation plans that won’t expose the business to risk, but at the same time be motivating and rewarding for FX Professionals?
If you would like to find out more about the FX market and recruitment strategies being adopted in this market, why not download our comprehensive report: “Foreign Exchange Market Review 2015”.