Richard Repetto
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Why Do Exchanges Own Multiple Licenses? It's Not Hard To See, Look at the SEC

In this recent research note, Sandler O'Neill + Partners, L.P. Principal Richard Repetto examines why the public exchange operators hold multiple licenses and that rationale behind this phenomenon.

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November 1, 2010

Analyst: Dodd-Frank Hurts Blocks

By Peter Chapman

Financial reform means less capital for block trades. That's the conclusion of Sanford C. Bernstein analyst Brad Hintz, who recently published a report on the future of institutional equities.

Sen. Chris Dodd

Hintz reports that new capital adequacy rules coming out of the Dodd-Frank Act and the Basel Accords will result in a decrease in the amount of capital banks will be willing to commit to customer trades.

The new rules are an attempt by Congress and the Bank for International Settlements to fortify the global banking system. The additional capital banks must maintain to support their assets will likely result in lower bank profitability, Hintz predicts. That will make them more choosy about how they use their capital.

"To offset the economic impact of the regulatory changes, we expect that successful equity divisions will tightly constrain their capital and balance sheet allocations," Hintz wrote in his report. "Free liquidity and the loss leading bids provided by the block trading desks of the Street will become a thing of the past."

Rep. Barney Frank

Leverage ratios will drop from 24:1 to 15:1, Hintz estimates. That will reduce the return on equity of the institutional equities business by 600 or more basis points.

There is a silver lining for a lucky few. Those firms with strong equities capital markets businesses will be able to withstand the blow from the new regulations, Hintz said. That's because their equities divisions share in ECM's rich profits. Hintz views Goldman Sachs and Morgan Stanley, with their industry-leading underwriting businesses, as less vulnerable to the new capital rules.

The rest, however, will have to "ration their balance sheet usage" and "provide liquidity only to their closest and most profitable clients," the analyst wrote. Hintz also forecasts upward pressure on pricing, so capital commitment will be more expensive for clients.


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