New U.S. swaps trading seen hurting banks less than feared

Wed Mar 26, 2014 11:04am EDT
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By Peter Rudegeair

(Reuters) - When U.S. regulators pushed trading in a profitable derivative on to newly created exchanges last month, many analysts feared the worst for banks' first-quarter results.

They worried that moving some of these interest-rate swaps - one of the most widely traded fixed-income derivatives that banks offer - to platforms called swap execution facilities (SEFs) would dry up volume, reduce banks' fees and make what was already expected to be a tough quarter for fixed income trading even more dire.

When SEFs came fully online on February 15, the immediate results were discouraging. The volume of derivatives through these new platforms plummeted by one-third as traders waited to see how the new system would work, said Anshuman Jaswal, senior analyst at Celent, a research and consulting firm.

But as quickly as volumes slumped, they rebounded. In the weeks following the rule change, they increased by 54 percent, Jaswal said. He added that there was some early anecdotal evidence indicating that the margins that banks earn on individual trades started to come down, but it was too soon to say that definitively.

"We think it was a temporary blip," said Will Rhode, director of fixed income research at TABB Group. "I would be surprised if dealers demonstrated in their first-quarter results some major impact from earnings because of the introduction of SEFs."

Major banks will report first-quarter results next month.

Trading in bonds, currencies and derivatives is one of the biggest businesses at the largest U.S. banks, accounting for 10 percent to 25 percent of overall revenues at banks such as JPMorgan Chase & Co (JPM.N: Quote), Citigroup Inc (C.N: Quote) and Goldman Sachs Group Inc (GS.N: Quote).

It's not clear how much of that revenue comes from trading in swaps that were moved to the SEFs, but the rebound nevertheless offers much-needed relief to banks.   Continued...

A sign outside the headquarters of JP Morgan Chase & Co in New York, September 19, 2013. REUTERS/Mike Segar