US banks lock down rate traders on pay

Wall Street banks are rushing to lock down their top interest-rates traders, in anticipation of bumper opportunities arising from a long-promised "lift-off" from the Federal Reserve.

Expectations have been mounting that the US central bank is on the cusp of increasing borrowing costs for the first time in almost a decade. This has spurred activity in interest rate swaps and options in the first half, pushing up rates revenues at all the biggest banks bar HSBC and BNP Paribas.

As a result, senior rates staff at US and European banks are on course to receive average rises in total pay this year of about 10 per cent, according to Options Group, a New Yorkbased recruiter.

The higher awards come as peers in other divisions such as commodities and securitised products are facing flat or falling payouts.

They also signal "a war for talent," according to Jessica Lee, a director at Options Group. She noted that headcount in rates departments has shrunk by about a third since 2008, amid tougher regulatory standards on risk-taking and an industry-wide push to conserve capital.

"Before the crisis, it was like a giant race where it cost $10 per entrant and the purse was $10m divided among the top ten finishers," Ms Lee said. "Post-crisis, it costs $1,000 per entrant and $6m is divided among the top five finishers. Banks can only afford to back the very best runners."

The pay rise for rates staff looks set to buck a general trend for banks' core fixed-income, commodities and currencies (FICC) units, which accounted for about a third (Morgan Stanley) to two-thirds (Citigroup) of total capital markets revenues during the first half of this year.

Base pay in FICC sales and trading held fairly steady across the industry last year, at around $400,000-$500,000 for managing directors at US banks and $800,000 to $1m for their European counterparts. Bonuses dropped by about 5 per cent.

Although Fed chair Janet Yellen has stressed that she will act only if she considers the economy strong enough, recent data - including a solid jobs report on Friday - have encouraged many Fed-watchers to think that a move in September is more likely than not.

The figures from Options Group, which are based on conversations with hundreds of bank employees, are projections of annual changes in total pay if bonuses - both cash and non-cash - were determined in the second quarter. As such, the actual numbers could change over the remainder of the year.

The closer the Fed appears to get to what it calls a "normalisation" of policy, the more traders and salespeople will "brush dust off their CVs" to test the market, said Dylan Pany, a principal consultant at finance-focused recruiter Selby Jennings.

Jim Borger, managing director at Greenwich Associates in Stamford, Connecticut, noted half a dozen bank-to-bank moves of top traders within the past year. "You want to solidify your rates teams before the Fed," he said.