Wells Fargo & Co. (WFC:US), the bank building a securities business to challenge Wall Street, promoted Dan Thomas to help clients clear trades and manage collateral and hired Deutsche Bank AG’s Eamon McCooey to run hedge-fund services.
The moves detailed in a Wells Fargo statement yesterday are the firm’s latest bid to round out its investment bank and move into activities dominated by competitors. JPMorgan Chase & Co. (JPM:US), which runs the biggest U.S. business dedicated to serving hedge funds, known as prime brokerage, also is expanding as post-crisis regulations force traders to comply with new rules on clearing derivatives and post more collateral.
After credit markets froze in 2008, “a lot of people woke up and realized there were a lot of risks and issues in the system, and that’s forcing market-structure changes,” Thomas said in an interview. “It became clear to us that we needed to reconsider how we are helping clients, and that we need to be able to provide them the funding, collateral management and the technology that they need.”
Prime brokers help hedge funds and other investment firms run their business by making it easier to borrow money or shares, clearing trades, holding assets in custody and keeping records. In years leading to the financial crisis, pretax profit margins were estimated at 40 percent to 50 percent.
McCooey worked at Deutsche Bank for the past 13 years and most recently led the Frankfurt-based company’s U.S. prime brokerage, according to Wells Fargo, which ranks fourth by assets among the nation’s lenders. He’ll join San Francisco-based Wells Fargo in September and report to Thomas.
Thomas, 48, joined Wells Fargo in its 2008 purchase of Wachovia Corp. and was head of interest-rate and commodities sales before yesterday’s announcement. He reports to Walter Dolhare and Tim Mullins, co-heads of the markets unit. They, in turn, report to John Shrewsberry, head of Wells Fargo Securities.
Thomas’s operation will bring together clearing capabilities for over-the-counter derivatives and futures, prime brokerage for hedge funds and other services such as securities lending and repos, or repurchase agreements, he said. The bank is also building its own clearing capabilities.
The group will help customers with collateral transformation, a process that allows them to swap lower-rated securities for higher-quality holdings that can be used to back derivatives trades with central clearinghouses. New rules require investors to post top-rated assets for more transactions and send them through clearinghouses to prevent a repeat of the 2008 market meltdown.
At least seven other banks including JPMorgan are seeking to assist customers with transformations, a practice that some investors and academics say could obscure risks to the banks and the financial system.
Wells Fargo has focused on prime brokerage since its plans to build the investment bank got started. In April 2012, the bank said it would purchase Merlin Securities LLC, which has since been rebranded under the Wells Fargo name. While that allows the bank to introduce clients to third parties that can clear trades and hold assets, McCooey will be charged with building those capabilities in-house, Thomas said.
“The first priority, provided the new owners can maintain the prime broker and custodian-neutral approach, is to add the execution, collateral and risk-management services of the bank to the Merlin offering,” according to a Global Custodian report published last year after the deal was disclosed.
The expansion is part of Wells Fargo’s larger push into equity trading. While hedge funds manage $2.4 trillion globally, according to Hedge Fund Research Inc., a fraction of the almost $14 trillion the Investment Company Institute says are managed by U.S. mutual funds, they trade more frequently and in a wider variety of instruments. Most mutual fund managers, by contrast, are restricted from engaging in short sales and hold onto their stocks and bonds for months or years.
Prime brokerage helps drive other equities-trading revenue as clients are more apt to trade with the firm, Morgan Stanley (MS:US) Chief Financial Officer Ruth Porat has said. Equity trading at the market leaders benefited from having the biggest prime-brokerage units, according to 2012 rankings from hedge-fund magazine Absolute Return & Alpha.
McCooey takes over a role recently held first by Stephan Vermut and then his son Aaron Vermut. They sold Merlin to Wells Fargo and then departed this year for Prosper Marketplace Inc., a peer-to-peer lender based in San Francisco.
Wells Fargo named four co-heads for equity sales and trading last month. The bank hired former UBS AG trader Michael Riley, naming him and Matthew Brown co-heads of equity trading, and added Patrick Neal, tapping him to oversee equity sales with Geoff Snyder.
Wells Fargo had trading revenue last year of $1.71 billion, the least among the six biggest U.S. banks. Revenue from underwriting debt and equity sales and advising on mergers climbed 33 percent in 2012 to $1.29 billion.
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