By Liz Capo McCormick Dec. 22 (Bloomberg) -- The most volatile foreign-exchange markets since at least 1992 means currency traders will see the smallest pay cuts as the worst financial crisis since the Great Depression wipes out bonuses on Wall Street. While bonuses, which account for the bulk of annual pay for traders and investment bankers, will fall an average 45 percent this year, currency traders will see declines of about 15 percent from 2007, the least of any department, according to Options Group, a New York-based consulting firm. Top executives at New York-based Goldman Sachs Group Inc., Morgan Stanley and Merrill Lynch & Co., gave up their bonuses as banks reported $1 trillion in writedowns and losses since the start of last year. The biggest drop in the Standard & Poor’s 500 Index since 1931, a $100-a-barrel collapse in oil prices and the largest losses in corporate debt led to 200,000 job cuts at banks around the world. Yet data from the Comptroller of the Currency show foreign-exchange trading revenue at U.S. commercial banks rose 66 percent in the second quarter from a year earlier. Trading accelerated after the collapse of Lehman Brothers Holdings Inc. in September. “Our team had been working long hours all year, but the days grew exponentially” after the Sept. 15 bankruptcy filing of New York-based Lehman, said Russell LaScala, head of North America foreign exchange at Deutsche Bank AG in New York. Foreign-exchange desks of Frankfurt-based Deutsche Bank and UBS AG of Zurich, the world’s two largest currency traders, posted three consecutive quarters of record revenue from foreign exchange, according to quarterly earnings reports. The firms didn’t break out the revenue figures. ‘Robust’ Business A trader who has been a vice president for three years will get on average a bonus of $350,000 to $450,000, according to Options Group, which started tracking pay and hiring more than a decade ago. Global heads of foreign exchange trading will receive average bonuses of $3.5 million to $4.5 million, down 10 percent from last year. “The top performers’ bonuses are going to be cut conservatively because they had record years, like the foreign exchange people,” said Bob Reed, co-chief operating officer and co-founder of the Options Group. “I see no limitations on volatility, so that business will go forward pretty robustly.” Volatility, which fuels increased trading and revenue for banks, surged to record levels in the weeks following Lehman’s bankruptcy as investors unwound holdings of higher-yielding assets to repay low-cost yen- and dollar-denominated loans. Implied Volatility So-called implied volatility on options for major exchange rates reached a record 26.55 percent on Oct. 24, from this year’s low of 9.27 percent in August, according to data compiled by New York-based JPMorgan Chase & Co. Traders use implied volatility to gauge expectations for currency swings and in setting options prices. The bank’s index, which began tracking implied volatility on three-month options in June 1992, averaged 8.87 percent for the five years prior to the collapse of the subprime mortgage market in September 2007. The index was 21.08 percent today. “The spike in market volatility led to wider spreads and higher trading volumes, driven by both hedging and risk management needs,” said Fabian Shey, global co-head of foreign exchange and money markets at UBS in London. “Facing pronounced movements in underlying equity markets and also currency markets, asset managers had an increased need for currency hedging.” Foreign-exchange contracts traded at the CME Group Inc., the world’s largest futures market, surged in September to a record 835,000 per day, a 32 percent increase from a year earlier, to a notional value of $111 billion. ‘Volume Exploded’ “As volatility started to rise, the increase in business was a result of clients trying to proactively position themselves,” Deutsche Bank’s LaScala said. “When the whole de- leveraging started, foreign exchange volume exploded as people were trying to take their risk down.” U.S. commercial banks reported $2.1 billion in foreign- exchange trading revenue in the second quarter, a 66 percent increase from the same period a year earlier, according to the latest data from the Treasury’s Office of the Comptroller of the Currency. Currencies revenue gained 14 percent in the first quarter. Foreign-exchange trading was about the only bright spot on Wall Street this year. While Treasuries have returned 14.7 percent, according to Merrill Lynch & Co.’s Treasury Master Index, average daily trading this year among the 17 primary dealers of U.S. government securities is $570.7 billion, compared with $571.6 billion in 2007, data compiled by the Federal Reserve show. Takeovers, Issuance Investment banking fees fell as takeovers shrank 36 percent from 2007. Fees for advising on mergers and acquisitions dropped 34 percent to an estimated $63 billion, according to data compiled by Bloomberg and New York-based research firm Freeman & Co. U.S. companies sold $859.4 billion of bonds this year, down 26 percent from 2007, according to data compiled by Bloomberg. The meltdown of the U.S. mortgage market that led to a freeze in global credit forced traders to abandon higher-risk assets and pay back loans taken out in yen, causing the currency to soar to a 13-year high against the dollar as investors pared so-called carry trades. The U.S. dollar gained against other major currencies through November as investors sought a haven from global turmoil. The exodus into the dollar and yen established a trend for traders to follow, according to Kathy Lien, director of currency research at GFT Forex. The New York-based online-currency trading firm’s volume surged 37 percent this year, including a jump of 157 percent in September and 187 percent in October, she said. Dollar Index ICE’s Dollar Index, which tracks the dollar versus a basket of currencies comprised of the euro, yen, British pound, Canadian dollar, Swedish krona and Swiss franc, increased 15 percent this year to a peak of 88.46 on Nov. 21. Since then the index fell 8.3 percent to 80.902. The yen has appreciated 24 percent this year versus the U.S. dollar to 90 yen. The billions of dollars made available by the Fed to other central banks and intervention to support local currencies by South Korea and other developing nations helped bolster trading, according to Neil Jones, head of European hedge-fund sales in London at Mizuho Capital Markets. Central banks intervene when they buy or sell currencies to influence exchange rates. The Fed set up currency swap lines with more than a dozen other central banks. Arrangements with Europe, the U.K. and Japan, are open-ended, allowing the Fed’s counterparts to draw as many dollars as they need. The value of the Fed’s System Open Market Account rose to $304.5 billion, from $87.8 billion at the end of June, due to the increased dollar funding provided to central banks through the swap lines. Central Bank ‘Animals’ “The biggest animals involved in foreign exchange are the central banks,” said Jones. “The combination of clear trends in the market and ample liquidity has helped foreign exchange do well this year.” Foreign-exchange funds had their biggest monthly returns in October since 2003, according to funds tracked by Stamford, Connecticut-based Parker Global Strategies LLC. Currency funds gained 2.53 percent in October, according to the firm, whose Parker FX Index tracks 68 firms managing more than $36 billion. “People in foreign exchange are still getting recruited,” said Jeanne Branthover, head of the global financial-services practice at recruiting firm Boyden Global Executive Search in New York. “Firms are saying to recruiters like us that they are always looking for the best talent in foreign exchange because it is an area that will still be revenue generating in 2009.” To contact the reporter on this story: Liz Capo McCormick in New York at Emccormick7@bloomberg.net

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