RPT-INSIGHT-Startup challenges dominance of big banks in derivatives markets

Tue Mar 10, 2015 10:55am EDT
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By Charles Levinson

March 10 (Reuters) - A new trading exchange for derivatives is loosening the stranglehold that the world's biggest investment banks have on the multi-trillion dollar market in a crucial test of financial reforms that attempt to reduce systemic risks.

The year-old trading venue, trueEX Group LLC, surprised many on Wall Street when it had nearly 20 percent of the trades in exchange-traded interest rate swaps in the U.S. for the week ending Feb. 20. Though it has not matched those numbers since, its 9 percent market share so far this year marks significant inroads for a startup vying against rivals backed by the most powerful banks, investors and traders said.

Interest-rate swaps allow investors, companies, and banks to hedge risk against future interest rate movements, and to bet on those movements. They are the most common type of derivative, usually involving a party who is paying a floating interest rate, swapping that payment for a more predictable fixed interest rate with another party, sometimes over the course of many years.

Many of the top derivatives dealers, including Goldman Sachs , Deutsche Bank, Citigroup, Barclays , Bank of America Corp, and Morgan Stanley , have declined to use trueEX. Other new exchanges have also struggled to get traction with major banks.   Continued...