HSBC shifts derivatives trading out of London to cut costs

HSBC is moving its derivative trading book from London to Hong Kong in a bid to cut costs arising from tight regulations in the UK and EU, The Telegraph reports.

Trading staff will stay put in London, but interest rate swap trades will be increasingly booked in Hong Kong.

It is part of a wider move by banks to cut back their derivatives trading desks because of higher regulatory costs.

Banks have to set increasing amounts of capital against their trading books to reflect the risks involved in the business.

While these capital buffers are designed to make banks more resilient, they also make it more expensive to run a business that traditionally ran on relatively low margins.

Combined with a period of predictable low interest rates, it has become more difficult to turn a profit from the operations.

By moving the trades’ registration to Hong Kong – a development first reported by Reuters – HSBC can reduce costs and make them more profitable.

In addition, the derivatives books will no longer add to HSBC’s bill under the UK’s bank levy. This tax once applied to banks’ global operations but under new rules will now only apply to British activities.

The move to switch derivatives trading to Hong Kong comes as the bank weighs up whether to relocate its headquarters out of the UK.

HSBC reports its third-quarter financial results next week, and analysts expect it to report a fall in its pre-tax profits compared with the last quarter, when it raised US$1bn from selling off its stake in China’s Industrial Bank.

The bank may also take a hit from the strength of the US dollar, the currency in which it reports global earnings.

“We continue to see HSBC’s primary issue as a ‘revenue problem’,” said Ian Gordon from Investec.

“For the past seven years, it has simply been unable to find sufficient loan growth opportunities to ‘replace’ its exit from over 80 businesses and markets. Moreover, lower interest rates have compounded the problem for it as a generally risk-averse, deposit-heavy bank.”