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And Another Thing…

Puth Leaves State Street

David Puth has decided to leave State Street after three years heading its global markets business.

Puth joined State Street in 2008 (Squawkbox, August 25, 2008) after a 20-year career in various foreign exchange divisions of the JP Morgan group. His role was newly-created and he was given responsibility for overseeing investment research, securities finance and trading activities globally.

His specific responsibilities included advancing State Street’s electronic trading services, building its suite of portfolio products and expanding its foreign exchange business. For securities finance, he focused on expanding the bank’s global reach.

Mike Rogers, executive vice president and head of global services Americas, will assume leadership of the global markets business in addition to his current responsibilities. Rogers is a 30-year industry veteran who led Investor Financial’s capital markets businesses before it was acquired by State Street in 2007.

A spokesperson for State Street says Puth is pursuing other opportunities in the financial services industry.

And Another Thing…

It is fashionable these days to bash the banks. Indeed, I was brought to task by a highly respected correspondent for the “sensationalist” tint in my column on Monday discussing the trust, or otherwise, between bank and client. But are these banking industry attack dogs barking up the wrong tree?

Firstly, I would like to stress that I was talking about a healthy distrust between bank and client. What I should have clarified is that the distrust exists between traders. Harsh as this may sound, bank traders since I can remember have always accused customers of “dealing away” and “stuffing” them, and customer traders have always been quick to accuse the banks of “pipping” them. Having worked on both sides of the divide, this to me is a fact of life and what keeps all traders on their toes, hence the use of the word ‘healthy’.

That said, I should also acknowledge that beyond the trading desk there is a great deal of trust between customer and bank, especially involving technology solutions to improve the customer’s life – after all, if a customer connects to a bank, both are effectively opening their doors to each other so there has to be trust.

In summary, it was not my intention to be seen as jumping on the “bash a bank” bandwagon, for as I stated in the original column, I believe the single bank portals to be the apex of technological excellence in the foreign exchange market.

The bandwagon I do wish to jump on, however, surrounds the collapse of MF Global. And in keeping with this column’s ethos of never being afraid to ask a stupid question (I may have missed something in the mass of regulatory updates), I will ask the question of US regulators (and I would love to know the CFTC’s position on this) as follows: Why, when there is so much desire to shut down bank trading desks and make them quasi brokers, has the broker-dealer model, which allows one firm to be principal and agent, continued to operate freely?

I have no idea what the answer is. Perhaps the CFTC would be reluctant because these firms typically operate on that agency’s preferred mechanism, the exchange, and use clearinghouses, but it seems to me that in the rush to cane the banks, the world has overlooked a similar model, one operated by firms with clearly lax controls, not only over their risk mechanisms but client money.

It strikes me that one of the major changes to come out of the collapse of Bear Stearns and Lehman Brothers was the demise of the investment banking model, one that very closely mirrored that of the broker-dealer. I am not sure if the regulators have been wrong-footed by these events. As I write, the clearing house model is showing its worth and client funds are being returned (in spite of the inevitable complaints in some quarters about how long it takes), but was MF Global that far off the radar?

It is always shocking when a firm collapses. I once experienced it from the inside and everyone, no matter what role they have, feels empty and tainted. There are some very good people working for MF Global, as there were at Refco (and Drexel Burnham long before that), and this should in no way reflect upon them, just as it didn’t with Lehman. But the people at the top, both at the firm and at the regulators, need to answer some questions. Legal minds will determine the questions of the firm’s management, but for the regulators it would be good to know how their oversight regime compared to those of the major banks in the wake of Lehman.

Thankfully for the FX market, MF Global was at the start of a major build up so the impact on our industry will be limited, but there will be an impact. Already I am being told of banks reluctant, or outright refusing, to extend credit facilities to hedge funds, not because they have doubts over the strength of the hedge fund, but because they don’t wish to extend their exposure to their prime brokers. As one source told me, it’s not necessarily the major prime broker, it’s more about who is the third or even fourth PB.

Inevitably, this makes credit an issue again in the industry although at least this time clients from the “real economy” such as asset managers and corporations will be (or should be) unaffected. In the firing line are the other broker dealers, which may or may not be fair, but either way it makes their job a lot more difficult.

It is at this stage that the regulators can probably help. By making clear what oversight they have been conducting on these firms, or by conducting a thorough inspection of these firms, they can help allay fears over their health. After all, what is better, allowing the thought that more broker-dealers are operating under the radar with the subsequent collapse in confidence in the model, or firmly establishing rules for these firms that are at least equivalent to, but (given the relative lack of financial strength) more stringent, than the banks.

Sometimes it is easy to wonder if the US regulators believe that Dodd-Frank is a panacea for all the financial market’s ills, which it is not; and whether they have dropped the ball on oversight of all market participants in their rush to challenge the banks?

Profit & Loss

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