investment banking and capital markets - … banking and capital markets market report—third...

INVESTMENT BANKING AND CAPITAL MARKETS

Market Report—Third Quarter 2006 Edition

New York

November 17, 2006

THE BOSTON CONSULTING GROUP

-1-

CONTENTS

Overview of Third Quarter 2006 Results 1

Market Review

• Fixed-Income and Equity Trading 8

• Advisory and Corporate Finance 15

Focus: Trends in U.S. Listed Derivatives Trading 23

Data Definitions 33

BCG Investment Banking Contacts 35

-2-

BCG’s performance index declined from outstanding highs in the first half of 2006 but remained at the same level it reached one year ago

• Revenues decreased 13 percent in the third quarter, mainly due to a sharp decline in advisory and equities underwriting deal volumes; global stock market and fixed income trading volumes were also lower

• Profitability declined slightly from the previous quarter, but overall industry profits were still higher than one year ago

Despite these developments, the industry remains on its trajectory for a record year in 2006

• Even an average performance in the fourth quarter would be sufficient to achieve the highest annual profits in the industry’s history

As a result, most investment bankers are looking forward to large bonuses, although the industry is managing compensation expenses cautiously

• Bonuses are expected to grow by roughly 20 percent, which lags the 27 percent growth in revenues over the first nine months of 2006

INDUSTRY REMAINS ON TRACK FOR A RECORD YEAR

Sources: Company reports; BCG analysis

-3-

THIRD-QUARTER PERFORMANCE FELL TO THE SAME LEVEL IT REACHED ONE YEAR AGO

Note: The BCG Investment Banking Performance Index is calculated based on aggregate profits of ten leading banksSources: Company reports; BCG analysis

136.3

165.7172.8

120.4

136.0

87.176.7

100.0

80.160.2

51.871.2

44.748.2

90.5 96.291.0 87.4

127.6

98.9

76.695.7

137.9

0

20

40

60

80

100

120

140

160

180

Q1/01 Q3/01 Q1/02 Q3/02 Q1/03 Q3/03 Q1/04 Q3/04 Q1/05 Q3/05 Q1/06 Q3/06

BCG Investment Banking Performance IndexIndex

2001 2002 2003 2004 20062005

-4-

TRADING AND DEAL ACTIVITY SLOWED ACROSS BUSINESSES IN THE THIRD QUARTER

0

200

400

600

800

1,000

1,200

Q1/01 Q1/02 Q1/03 Q1/04 Q1/05 Q1/06

0

100

200

300

400

500

600

Q1/01 Q1/02 Q1/03 Q1/04 Q1/05 Q1/06

$B

M&A Advisory(2)

$B

U.S. Bond Trading(1)

(1) Daily average trading volumes for treasuries, agencies, asset-/mortgage-backed securities (ABS/MBS), and corporate bonds(2) Announced transactionsSources: Thomson SDC; World Federation of Exchanges; Federal Reserve Bank of New York; BCG analysis

Americas

Asia

Europe

0

20

40

60

80

Q1/01 Q1/02 Q1/03 Q1/04 Q1/05 Q1/06

$B

Equity Origination

0

2

4

6

8

10

Q1/01 Q1/02 Q1/03 Q1/04 Q1/05 Q1/06

$T

Equity Trading

Trading VolumesCorporate Finance/Advisory

Volumes

-5-

REVENUES AND PROFITABILITY DECLINED FROM THE PREVIOUS QUARTER

Pre-tax profit margin (%)

Notes: Ø calculated on a revenue-weighted basis; revenue includes investment banking, institutional sales and trading, principal investmentsSources: Company reports; BCG analysis

Revenues($B)Ø -13.0%

15%

20%

25%

30%

35%

40%

45%

1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0

ML

GS

MS

Citi

BS

DB

UBS

Q2/06

Q3/06

JPMC

Q2/06 Ø: 33.9%

Q3/06 Ø: 32.0%

CS

LB

Pre-tax Profit Margins and Revenues:Q3 2006 vs Q2 2006

Ø-1

.9%

-6-

CITIGROUP AND MORGAN STANLEY MADE GAINS IN PROFITABILITY OVER THIRD QUARTER 2005 RESULTS

Pre-tax profit margin (%)

Notes: Ø calculated on a revenue-weighted basis; revenue includes investment banking, institutional sales and trading, principal investmentsSources: Company reports; BCG analysis

Revenues($B)

Ø +4.2%

15%

20%

25%

30%

35%

40%

45%

1.0 2.0 3.0 4.0 5.0 6.0 7.0

ML

GS

MS

Citi

BS

DB

UBS

Q3/05

Q3/06

JPMC

Q3/06 Ø: 32.0%

Q3/05 Ø: 32.7%

CS

LB

Pre-tax Profit Margins and Revenues:Q3 2006 vs Q3 2005

Ø-0

.7%

-7-

ADVISORY AND CORPORATE FINANCE REVENUES HAVE GROWN STRONGER THAN TRADING REVENUES

Note: Not including principal investments and “other” revenuesSources:Company reports; BCG analysis

0

1

2

3

4

5

6

GS

3Q05 3Q06

MLMS Citi DBJPMC LB CSUBS BS Total Total

29.6

30.6

7.9 8.8

% Change

+3%

+11%

Revenues by Company: Q3 2005 vs Q3 2006

Trading Revenues

Advisory & Corporate Finance Revenues

Total Revenues ($B)

$B

05 06 3Q05 3Q06

37.539.5 +5%

05 06 05 06 05 06 05 06 05 06 05 06 05 06 05 06 05 06

-8-

CONTENTS


Market Review




Data Definitions 33


-9-

FIXED-INCOME AND EQUITY TRADING REVENUES FELL BUT REMAINED STRONGER THAN THEY WERE ONE YEAR AGO

Fixed-Income Trading

• Following a seasonal pattern, the volume and revenues of fixed-income trading declined from the second quarter 2006, but revenues were stronger than they were one year ago

• Several non-seasonal factors also played a role in hampering fixed-income trading volumes and revenues this quarter:

- The interest-rates business faced a difficult environment as European yield curves continued to flatten

- Widening credit spreads negatively affected the high-yield credit trading business

- The commodities business – the growth engine in previous quarters – was affected by lower oil prices, though gas and power trading continued to be strong

Equity Trading

• Equities trading volumes dropped by 17 percent to $15.5 trillion in the third quarter

• Equity derivatives continued to be a growth engine for most investment banks, with strong product demand from retail and institutional investors

• The growth of hedge fund assets slowed in the third quarter, most notably in the U.S., which led to lower growth in prime brokerage

Source: Company reports, BCG analysis

-10-

FOLLOWING A SEASONAL PATTERN, FIXED-INCOME TRADING REVENUES FELL, BUT REMAINED HIGH


Notes: Daily average trading volumes with inter/dealer brokers and others; aggregated trading revenues for ten leading investment bankssurveyed

Sources: Federal Reserve Bank of New York; BCG analysis

Total

MBS/ABS

Corp. Bonds

Treasury/Agencies

Fixed-Income Trading Revenues by Quarter

0

25

50

75

100

125

150

175

200

Q1/03 Q3/03 Q1/04 Q3/04 Q1/05 Q3/05 Q1/06 Q3/06

102

130 129

91

Index

144

124

U.S. Daily Average Bond-Trading Volumes

0

200

400

600

800

1,000

1,200

Q1/03 Q3/03 Q1/04 Q3/04 Q1/05 Q3/05 Q1/06 Q3/06

$B

869909

803

920 914954

919

105

956

108

1661,069

1,092

117

1,054

154

117

1,0631,108

1921,070 1851,037

163

-11-

YIELD CURVES REMAINED FLAT

Source: Bloomberg


-100

-50

0

50

100

150

200

250

300

Jan-97 Dec-97 Dec-98 Dec-99 Dec-00 Nov-01 Nov-02 Nov-03 Oct-04 Oct-05 Oct-06-100

-50

0

50

100

150

200

250

300Basispoints(U.S.)

GermanyU.S.

Basispoints(Germany)

Ten-Year/Two-Year Treasury Yield Spread

-12-

BOTH EQUITY TRADING VOLUMES AND REVENUES ENDED SOFTER IN THE THIRD QUARTER

Equity Trading

Notes: Trading volumes single counted, includes investment funds traded at exchanges; aggregated trading revenues for ten leading investment banks surveyedSources:World Federation of Exchanges; BCG analysis

Global

Asia

Europe

Americas

Equity Trading Revenue by Quarter

0

50

100

150

200

250

300

Q1/03 Q3/03 Q1/04 Q3/04 Q1/05 Q3/05 Q1/06 Q3/06

Index

87107 100 98

126

10189

110

136

112

155141

227

187

156

Global Exchange Trading Volumes

0

5

10

15

20

Q1/03 Q3/03 Q1/04 Q3/04 Q1/05 Q3/05 Q1/06 Q3/06

$T

6.98.1

8.79.3

11.310.5

9.2

11.2

12.312.1

12.813.8

17.618.7

15.5

-13-

GLOBAL STOCK MARKETS BOUNCED BACK FROM WEAK SECOND-QUARTER PERFORMANCE

Equity Trading

Development of Main Equity Indices

0

20

40

60

80

100

120

140

Nikkei 225

S&P 500

FTSE E300

Q1/02

S&P 500 Nikkei 225FTSE E300

Q3/01 Q3/02Q1/03Q1/01

Q3/03

Index

Q1/05Q3/05

Q1/04Q3/04

Q1/06

Source: Bloomberg

Q3/06

18.0%

9.7%

28.0%

9.5%

7.0%

0.1%0%

10%

20%

30%

ChangeQ3/06 vs Q3/05

ChangeQ3/06 YTD

Percentage change

-14-

MARKET VOLATILITY DECLINEDEquity Trading

0

10

20

30

40

50

-8.4%

-0.7%

-10%

-5%

0%

5%

Change Q3/06 vs Q2/06

Change Q3/06 YTD

Source: Bloomberg

Percentage changeIndex

Market Volatility Index (VIX)

Q1/02Q3/01 Q3/02

Q1/03Q1/01Q3/03

Q1/05Q3/05

Q1/04Q3/04

Q1/06Q3/06

-15-

CONTENTS


Market Review




Data Definitions 33


-16-

THE GLOBAL ADVISORY AND CORPORATE FINANCE BUSINESSES DECLINED IN THE THIRD QUARTER

Advisory• Global M&A volume continued to decline in the third quarter, but the aggregated deal volume for

the first nine months in 2006 was higher than it was during the same period last year• JPMorgan Chase climbed to the top of the American M&A market, the first sign of the bank’s

comeback• UBS gained market share both in Europe and the Americas, but is still behind the market leaders • Overall M&A outlook remains positive, as European economies show strength and the U.S.

economy is heading towards a soft landing- Availability of liquidity to finance deals at attractive rates, especially in Europe, may further

spur acquisition activities

Corporate Finance• The global equity-capital market slowed by 26 percent to $109 billion from the previous quarter; the

slowdown was driven mainly by the Americas - The Americas issued less equity than both Asia and Europe in the third quarter of 2006

• Bond markets declined only slightly, except in the Americas, where corporate bonds for industrial issuers contracted by 23 percent from last quarter

- Global securitization volumes were up, fueled by growth in Collateralized Debt Obligations, while ABS issuance performed solidly, most notably in Europe

Sources: Company reports; BCG analysis

-17-

GLOBAL M&A VOLUME CONTINUED TO DECLINE IN THE THIRD QUARTER

Advisory

Effective M&A Deals

101 127 142 142 107 128 163 141 161205

296 269 254 218 220

123146 109

154

112

240250 267 186

191

323311 372

306 283

4244 58

50

34

54

76 57

42

70

88120

82

8857

0

200

400

600

800

Q1/03 Q3/03 Q1/04 Q3/04 Q1/05 Q3/05 Q1/06 Q3/06

($B)

266310317

346

254

422

489 466

389

467

707 700 708

560611

Note: Global figures and percentage changes based on complete, not rounded, figuresSources:Thomson SDC; BCG analysis

Percentage change

1%

-35%

5%

37%

-7%

13%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

-8%

20%

Q3/06vs. Q2/06

9M 2006vs. 9M 2005

Global

Americas

Asia

Europe

-18-

UBS GAINED SHARE IN BOTH THE AMERICAS AND EUROPE

Notes: Based on effective deals; market position expressed relative to market leaderSources: Thomson SDC; BCG analysis

Advisory

0%

20%

40%

60%

80%

100%

0% 20% 40% 60% 80% 100%0%

20%

40%

60%

80%

100%

0% 20% 40% 60% 80% 100%

Gainedshare

Lost share

Gained share

Lost share

American M&A European M&A

BNP

ABN

GS

DB

CS

ML

MS

CitiJPMC

UBS

Lazard

Calyon

Relative market position9M 2005


Relativemarketposition9M 2006


LBHSBC

Rothschild

DKW

GS

DB

CSML

MS

Citi

LBUBS

BSLazard

BoA

JPMC

Wachovia

BlackstoneCIBC

BMOMediobanca

TD

-19-

THE AMERICAS ISSUED LESS EQUITY THAN ASIA AND EUROPE IN THE THIRD QUARTER

Global

Americas

Asia

Europe

Corporate Finance

Equity Issuance

417 15 23

3929 31

5242 37 44 51

3849 43

12

22 29

37

43

39 32

44

3331

4446

48

49

28

8

1020

42

39

2225

31

29

26

38

51

39

49

38

0

20

40

60

80

100

120

140

160

Q1/03 Q3/03 Q1/04 Q3/04 Q1/05 Q3/05 Q1/06 Q3/06

($B)

23

64

49

102

120

90 88

128

105

93

126

148

125

109

147

Note: Global figures and percentage changes based on complete, not rounded, figuresSources:Thomson SDC; BCG analysis

Percentage change

-11%

-23%

6%

16%

-43%

35%

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

-26%

18%

Q3/06vs. Q2/06

9M 2006vs. 9M 2005

-20-

JPMC GAINED SIGNIFICANT SHARE IN EUROPEAN EQUITY-CAPITAL MARKETS

Corporate Finance

0%

20%

40%

60%

80%

100%

0% 20% 40% 60% 80% 100%0%

20%

40%

60%

80%

100%

0% 20% 40% 60% 80% 100%

Gainedshare

Lost share

Gained share

Lost share

Share of AmericanEquity-Capital Markets

Share of EuropeanEquity-Capital Markets

BNP

ABNGSDB

CS ML

MS

Citi

JPMC

UBS

Calyon

LBHSBC

DKW

GS

BoA

CS ML

MS

Citi

LBUBS

JPMC

WachoviaRBC

CIBCBMO

Note: Market position expressed relative to market leaderSources: Thomson SDC; BCG analysis

FBR

DB

BS SG

HVB/UBM

Coba





-21-

FIXED-INCOME UNDERWRITING DECLINED, MOST NOTABLY IN THE AMERICAN CORPORATE BOND MARKET

Issuance of All Bonds

Note: Corporate bonds for industrial issuers only; global figures may differ from the sum of sub-totals due to roundingSources: Thomson SDC; BCG analysis

Issuance of Corporate Bonds

Corporate Finance

0.4 0.40.3 0.3

0.50.4 0.3 0.4

0.6 0.50.3

0.50.6 0.6 0.5

0.8 0.80.7 0.6

0.8

0.7 0.7 0.7

0.8 0.9

0.9

0.9

1.01.0

0.9

0.1 0.1

0.1 0.1

0.1

0.1 0.1 0.1

0.1 0.1

0.1

0.1

0.10.1

0.1

0.0

0.4

0.8

1.2

1.6

2.0

Q1/03 Q3/03 Q1/04 Q3/04 Q1/05 Q3/05 Q1/06 Q3/06

($T)

1.2

1.1

1.3

1.0

1.4

1.1 1.2 1.2

1.5 1.5

1.3

1.5

1.7

1.5

1.7

47 54 44 50 39 5028 32 42 50

3152

67 64 62

91107

7785

77 59

6882 64

66

60

57

8881

62

21

27

14

20

17 1920

1618

24

22

19

1921

22

0

40

80

120

160

200

Q1/03 Q3/03 Q1/04 Q3/04 Q1/05 Q3/05 Q1/06 Q3/06

($B)

159

136

187

155

133 129115

130124

140

113127

174

147

166

Global

Americas

Asia

Europe

-22-

BARCLAYS CAUGHT UP WITH CITIGROUP AND DEUTSCHE BANK IN THE EUROPEAN BOND UNDERWRITING MARKET

Note: Market position expressed relative to market leaderSources: Thomson SDC; BCG analysis

Corporate Finance

0%

20%

40%

60%

80%

100%

0% 20% 40% 60% 80% 100%0%

20%

40%

60%

80%

100%

0% 20% 40% 60% 80% 100%

Gainedshare

Lost share

Gained share

American Bond UnderwritingMarket Share

European Bond Underwriting Market Share

GSBoA

RBS

MLMS

LB

UBS

JPMC

Barclays

NomuraTD RBC

DB

CIBC

ABNBNP

Barclays DB

CS

Citi

RBS

JPMC

LB

UBS

DKW

MS

Nomura

Calyon

HVB/UBM

HSBC

BNP

ABN

SG

GSBoARBC

WestLBTD

BSC

Wachovia

HSBC

Lost share

Citi

CS





ML

-23-

CONTENTS


Market Review




Data Definitions 33


-24-

TRENDS IN U.S. LISTED DERIVATIVES TRADING: A CONSOLIDATING MARKET

The U.S. listed derivatives market has had high historical growth, especially since 1999, and – despite several downturns – the conditions for continued growth persist

The market, however, is facing mounting pressure on clearing and execution margins, with electronic execution and commoditization of derivatives instruments driving down prices

• As a result, leading Futures Commission Merchants (FCMs) are capturing less and less value per contract traded

The industry has responded with a wave of consolidation – the top 15 players have 86 percent of the market versus 73 percent in 2001 – around two distinctive groups of FCMs

• Large brokerage firms are integrating their derivatives trading business with cash trading and prime brokerage services, and are becoming increasingly dominant

• Large independent FCMs are broadening their capabilities and services to include securities lending, margin financing, cross margining, and capital introduction

We expect industry consolidation to continue, driven by two major factors• Large securities houses in the U.S. and abroad are seeking to benefit from the recent growth in

this market and will most likely continue to acquire smaller independents • Independent players will continue to face profitability pressures and are interested in

partnering up – either to gain scale or broaden their product scope and cross-sell additional products

Sources: CFTC; BCG analysis

-25-

FUTURES COMMISSION MERCHANTS (FCMs) TRADE LISTED DERIVATIVES ACROSS ASSET CLASSES

Market Definition

OTCderivatives

OTC cashsecurities

Listed cashsecurities

Listedderivatives

Equity FixedIncome

F.X. Commo-dities

Asset classes

Security types

Products & services

Services, reporting

Futures Commission Merchants (FCM)

• Listed derivatives products & services

• Example:

Execution/ ClearingResearch

Securities financing

Securities Trading Business Segments


-26-

LISTED DERIVATIVES GROWTH HAS BEEN FUELED BY SINGLE STOCK OPTIONS AND FUTURES

(1) Excludes Kospi index optionsSources: NFA; Futures Industry

0.5 0.6 0.6 0.90 0.1

1.5

2.3

1.11.6

1.8

2.3

0.6

0.9

1.1

1.4

0

2

4

6

8

1999 2001 2003 2005

Listed futures and options volumes(1)

Equity index

Interest rates

Single StockOptions &Futures

Commodities

CAGR 99/05:

21%

Contractstraded(B)

3.2

6.9

4.9

2.2

CAGR 03/05

13%

13%

24%

23%

-27-

THREE MAJOR FACTORS EXPLAIN VOLUME GROWTH

Increase In Key Users (i.e. Hedge Funds)

Growing Role Of Electronic Markets Growth In Listed OTC Products

(1) Globex accounts for only 55% of contracts traded on CBOTSources: ABN Amro; BIS

220

340

640

800

2000 2002 2004 2005

Illustration : Global Hedge funds AuM ($B)

CAGR+30%

OTC and listed derivatives globalnotional amounts ($T)

95150

251285

28

47

93

115

2000 2002 2004 20050

200

400

600

800

1,000

1,200

2000 2001 2002 2003 2004 2005

Derivative contracts traded (M)

Illustration: CME outcry and electronic volumes

CMEoutcry

CMEGlobex

(electronic)

Globex(%)

15 20 35 44 58 71(1) Listedderiv. (%)

23 24 27

CAGR+36%

Conversion of OTC into listed products

29Note : Excludes funds of funds

Listed derivatives

OTC derivatives

Conditions for continued growth persist

-28-

27% 26%

14%

5%

23%

52%

41%

19%

-3%

9%13%12%

26%

46%

35%33%

10%14%

18%

-10%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

Annual growthin tradedcontracts(%)

Yearly volume growth rates

CAGR +18%

E

Sources: BIS; Futures Industry Association; BCG analysis

WHILE ITS GROWTH HAS BEEN STRONG, THE DERIVATIVES BUSINESS HAS EXPERIENCED SEVERAL DOWNTURNS

-29-

Comparison with equity cash indicates the beginning of a long-term decline

Sources: CSFB equity research; Merrill Lynch equity research

0.00

0.05

0.10

0.15

0.20

0.25

1998 1999 2000 2001 2002 2003 2004 2005 2006E

US Europe

Cash equity brokerage commissions,as % of traded amount

Pressure is mounting on FCM margins, which have declined since 2004

0.40

0.45

0.50

0.55

0.60

0.65

0.70

2002 2003 2004 2005 2006E 2007E

FCM net keep per contract (clearing+execution)

($)

FUTURES COMMISSIONS ARE ERODING

Note: Illustration based on 2005 Refco financial data

-30-

LARGE SECURITIES HOUSES ARE DISPLACING FCM PURE PLAYERS IN DERIVATIVES TRADING

Source: CFTC

1

1Large securitieshouses

FCM pure player

2003 EoY

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

Market share of the 15 leading

players

Goldman Sachs

Salomon Smith Barney

Merrill Lynch

JP Morgan

GSA Clearing

UBS Warburg

Refco

Morgan Stanley

Carr Futures

Man Financial

Basic One

Fimat

Bear Stearns

Lehman Bros.

ABN Amro

2001 EoY

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

73%

May 2006

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

•Goldman Sachs

•UBS

•Citigroup

•Man Financial

•Merill Lynch

•Calyon Fin

•JP Morgan

•Fimat

•ABN Amro

•Lehman Bros.

•Bear Stearns

•Morgan Stanley

•Barclays Cap

•Prudential

•Deutsche Bank

86%

Goldman Sachs

Citigroup

JP Morgan

Refco

UBS

Merrill Lynch

Calyon Fin

Fimat

Man Financial

Lehman Bros.

Morgan Stanley

ABN Amro

Bear Stearns

Barclays Cap

RJ O’Brien

2005 EoY

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

85%

Goldman Sachs

Citigroup

JP Morgan

Merrill Lynch

UBS

Man Financial

Carr Futures

Fimat

Refco

Morgan Stanley

Barclays Cap

ABN Amro

Lehman Bros.

Bear Stearns

Deutsche Bank

81%

Customer equity ($B) May 06

•11 800

•11 500

•9 300

•8 500

•7 000

•6 600

•6 200

•5 200

•3 900

•3 600

•3 400

•3 100

•2 100

•2 100

•2 000

Acquired

Top 15 FCMs

Changed name

-31-

Refco Grew Faster Than the Market – Mostly Externally 17 Acquisitions Since 2002

Year

20022002200220032003200420042004200420042004200420042004200520052005

Target

First optionsMST CanadaMain Street TradingSpear, Lead & KellogCFG FinancialEdinburgh Fund MgtSG IMCardales UKMAC FuturesCarlton BrokerageFriedberg MercantileRB&HTrafalgar CommoditiesPioneer FuturesThe League CorpEasy Screen Cargill IS

Business

FCMFCMFCMFCMFCM

Asset MgtAsset MgtAsset Mgt

FCMFCMFCMFCMFCMFCMFCMFCMFCM

Customer equity($M)

0

2,000

4,000

6,000

8,000

10,000

1999 2000 2001 2002 2003 2004 2005 2006

Acquisitionby Man

FinancialBankruptcyIPO

11-2005

Acquisition ofCargill Investor

services

“It has been our practice to integrate and rationalize companies as rapidly as possible, transferring operations

to our existing platform” - Refco IPO prospectus

Source: CFTC, Refco reports

EoY MayEoYEoYEoYEoYEoYEoY

CAGR 99-06

Refco/Man30%

FCM market20%

Customer equity ($M)

500nana200nansnsnsnanananana120nana

1300

AT THE SAME TIME, A SMALL NUMBER OF INDEPENDENT FCMs ARE CONSOLIDATING THEIR POSITIONS

Example: Refco

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MARKET OUTLOOK

While conditions for continued growth in the listed derivatives markets persist, the same drivers that fuel growth are hurting the economics of market participants

• Electronic futures and options trading, implying progressively cheaper and easier direct access to exchanges, will reinforce margin pressure and the commoditization of the derivatives business

• A gradual introduction of trading in penny increments in the U.S. options business will accelerate this trend and put additional pressure on derivatives traders and market makers

These drivers will favor larger securities houses, who can improve their FCM economics by cross-sellingprime brokerage services and other multi-asset product offerings to their clients

• Currently only three “independent” derivatives dealers are left among the 15 leading U.S. Futures Commission Merchants

But margin pressure is not likely to lead to the extinction of independent derivatives brokers and market makers in the near future – several factors work in favor of independent derivatives houses

• Clients, especially larger hedge funds, value independent FCMs, which are not conflicted with competing proprietary investment activities

• Large independent derivatives houses will continue to acquire smaller players to gain scale. They will also continue to expand their services into the prime brokerage domain including securities lending, margin financing, capital introduction, etc., to counter eroding margins in their core business

• Companies can still profit and grow despite margin pressure. For example, although equities cash experienced a long-term decline in margins over the past 25 years, volumes have, on average, grown faster, resulting in positive market revenue and profit growth


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CONTENTS


Market Review




Data Definitions 33


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DATA DEFINITION OVERVIEW

Regional deal allocation is based on issuer’s country (parent issuer’s country, where available); M&A deals are allocated by target nation

Thomson SDC was used for capital-market data

Relative market shares are based on bookrunner league tables

Equity Capital Markets data include common stock IPOs and secondary issues only

Data on bond origination contain all convertible and nonconvertible bonds, including ABS, MBS, municipals, agency, and corporate bonds

Corporate bonds are limited to industrials and utilities, excluding financial services issuers

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CONTENTS


Market Review




Data Definitions 33


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BCG INVESTMENT BANKING CONTACTS

Svilen Ivanov Achim Schwetlick Vice President & Director Vice President & Director New York New York +1 212 446 2800 +1 212 446 2800 [email protected] [email protected]

Robert Grübner Ranu Dayal Vice President & Director Vice President & Director Hamburg Singapore +49 40 30 99 60 +65 6429 2500 [email protected] [email protected]

For questions regarding methodology and analyses, please contact:

Boris Rauls Project Leader New York +1 212 446 2800 [email protected]

investment banking and capital markets - … banking and capital markets market report—third...

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