What does the fixed income department actually do and why has it been so unprofitable? Do they just trade bonds? Curious why UBS has to resort to winding down the business and why other banks don't have that problem.
I have an interview with a rival bank in a strategy department, and I just want to understand the different business lines. Thanks.
http://www.reuters.com/article/2012/10/30/us-ubs-restructure-idUSBRE89S…
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Most BB's have an equity and a fixed income division. Fixed income is a massive operation and it provides sales, trading and research to the bank and it's clients.
Fixed income deals usually deals with credit, rates, currencies, commodities, debt/loans and mortgage/asset backed products. There are various groups and specific functions based on each product but generally there are similar functions across each product.
Sales is the client facing side of the bank and responsible for representing the bank and working with traders and research to provide guidance to institutional clients. Trading manages the banks position, provides liquidity, works with the sales people to fill client orders and responsible for generating profit for the bank. Research publishes reports for internal and external audiences. This does not generate revenue for the bank but clients tend to reward good research with more orders/trades. Quant/Algo teams work with the research/traders to program and develop new ideas.
Fixed income is costly operation due to the balance sheet needed to provide all the services. The cost of running a fixed income division has gone up with regulatory pressure and profit has been slow to recover after the 2008 crises. In general, spreads in fixed income space have narrowed (technology, lack of novel ideas, low interest rates), therefore it is a lot harder to make money.
In the case of UBS, they took a major hit during the crisis (60B write downs) and fired their whole division. They were rebuilding their operation but they were mainly a competitor on scale (ex. big balance sheet) due to lower costs. With the new capital requirements, many fixed income desks prove to be too volatile and risky to be worth the investment.
In a nutshell FI trading requires massive amounts of capital and exposure to risk and for many banks is not earning an adequate return on capital for reasons mentioned above.
Nice explanations, thanks guys.
sorry to resurrect an old thread. moronic question (dont really understand the anatomy of financial institutions yey), but what's the difference between a fixed income division and funds that invest in fixed income? would they be considered the same if you were compiling a database and asked if the companies reported have a FID?
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