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April 30, 2024
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DCM sits inbetween investment banking and trading.
-IB guys convince a client (corp, sovereign, ect..) they need to raise capital, and to use their bank to do it.
-DCM then gets the green light to arrange the logistics of the capital raise...maybe they talk to trading to help with market color and pricing details...DCM will talk with sales to help find buyers of the client issuance (normally corp bonds) ahead of the actual issuance. -Deal Hedging...depending on the capital raise there will often be specific hedging requirements (does the corp want to do a rate-lock, to lock in the level of interest rates? Do customers want to buy the corp bonds on spread..usually to LIBOR Swaps or Treasuries). If the deal crosses currencies...is there an FX hedge to be done?
The bank traders make the most money when there is a hedge to be done, because they can push the market around at the time they put the hedge on, and again when they take the hedge off...so the hedging aspect can be the most profitable aspect of DCM Trading. The IB guys (not DCM) get a fee for their advice...but depending on the deal size and complexity, this is not always very large...but it can be.
These hedging $$s can be significant. I was on a mid-tier rates desk that once made 25mm in one year just from deal hedging...that does not include the advisory fees, or FX hedging, or the option component that some clients engage...this was just easy money into the pocket of the trading desk.
Since the actual hedging is where the most money comes to the DCM group...being a part of structuring (planning the hedging) can be lucrative. You'll learn a lot, will have exposure to PnL, and exit ops mostly revolve around other derivatives desks as a structurer. Nothing to sneeze at..these guys can make more than 1mm+ if they are good and have a range of quant/structuring experience. I've even seen these structuring guys get poached to hedge funds...
However, you are correct that if DCM has no deal flow....then there is nothing to structure. All of the top 14 banks have enough DCM deal flow to make this a good gig...but the more deal flow...the better
top 14 in the US (in no particular order) GS MS JPM Citi BofA HSBC Barclays Deutche CreditSuisse UBS BNP SocGen RBC RBS etc...
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in that case, then exit ops will mostly be constrained to other similar positions...but like i said up top, all the to banks will have a similar position....and as you get experience with customized project-based hedges, you will have an opportunity to get exposure to derivative structures. All option desks have a variety of quant types that engage with structuring, and its almost always customized...so anyway that you can get exposure to the hedging process will be helpful with exit ops to other option / derivative desks.
The most important thing is just getting your foot in the door....its must easier to lateral within sales & trading AFTER you are inside a BB bank...and every bank will have a DCM group that does hedging for its deals...so there will always be a market for people with these custom skills.
You are correct that you will develop a specialized skillset..this is good and bad. It limits your exit ops...but for those exit ops, only a select few people will actually have the skills to do those jobs...and this is not a bad skillset to have.
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