Credit Suisse shakes Europe's bond markets with exit as primary dealer

Credit Suisse shook Europe's bond markets by deciding to drop its role as a primary dealer across the continent.
Credit Suisse shook Europe's bond markets by deciding to drop its role as a primary dealer across the continent.PHOTO: AFP

LONDON (BLOOMBERG) - Credit Suisse AG shook Europe's bond markets by deciding to drop its role as a primary dealer across the continent, the latest signal that some of the world's biggest banks are scaling back in one of their key businesses.

The move coincides with the Zurich-based bank's overhaul of its trading and advisory services, after fixed-income revenue plunged. Credit Suisse will withdraw from the UK primary-dealer market on Friday (Oct 23), the nation's Debt Management Office said.

It's the first time a gilt primary dealer - which buys sovereign debt directly from the government - walked away since December 2011, when State Street Corp.'s European division withdrew.

"This is a dramatic move for Credit Suisse, and a step back for bond-market liquidity," said Christopher Wheeler, an analyst at Atlantic Equities LLP in London. "This is probably designed to reduce costs and capital tied to its investment bank business. I hope it's not a shape of things to come for the bond market."

The world's biggest banks are shrinking their bond-trading activities to comply with regulations such as higher capital requirements imposed following the financial crisis. These restrictions have curbed their ability to build inventory or warehouse risk. The result is that prices can be more volatile for money managers and private investors.

The situation has worsened in the past five years. The size of US Treasury market, for example, has expanded by more than 45 per cent in five years to US$12.9 trillion, according to data compiled by Bloomberg. At the same time, the five largest primary dealers - those financial institutions that trade with the Treasury - have cut their balance sheets by about 50 per cent from 2010, according to data from Tabb Group LLC.

reasuries Credit Suisse will remain a primary dealer for the US Treasuries market, according to a London-based company spokesman, Adam Bradbery.

"This is part of scaling back the macro business," Bradbery said. "We are in the process of exiting all our European primary dealer roles." Credit Suisse may still trade gilts, but is no longer committed to making markets for them, he said.

Credit Suisse was among the smaller of the global investment banks that act as primary dealers across the European Union. It operated in seven EU countries, including Germany, France, Italy and Spain, while Barclays is in 17, according to data from the Association for Financial Markets in Europe. Citigroup, JPMorgan Chase & Co., Deutsche Bank, Goldman Sachs, HSBC and Societe Generale operate in at least 14.

"You're seeing pressure at every single bank," said Harvinder Sian, a fixed-income analyst at Citigroup in London. "If you're not something of a monster in terms of presence and market share, then the economics just don't stack up."

The move by Credit Suisse left the number of UK gilt primary dealers at 20, compared with 16 about a decade ago.

"We are always aware that a major reassessment of strategy by an individual bank is a possibility," said Robert Stheeman, chief executive of the U.K. Debt Management Office in London. "One institution's withdrawal could also signal another's increased opportunity. What is critical from our perspective is that we still have a large community of banks making markets and the gilt market continues to perform well."