Swap exchanges launch in threat to Wall Street profits

Wed Oct 2, 2013 1:32pm EDT
 
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By Douwe Miedema

WASHINGTON Oct 2 (Reuters) - More than a dozen new U.S. exchanges opened their doors for clients on Wednesday, marking the start of regulated trading of derivatives in a threat to one of Wall Street's most lucrative businesses.

Business may be tepid at first, because the bulk of the $630 trillion market will slowly move over to the exchanges in the coming months, as part of a gradual implementation of the Dodd-Frank law to overhaul Wall Street.

Moreover, the Commodity Futures Trading Commission, which regulates the so-called swaps - used to offset risk, but mainly to speculate - has just sent virtually all of its people home as part of the U.S. government shutdown.

But in the long run, the exchanges are a credible threat to a highly profitable business for banking behemoths such as JP Morgan Chase & Co, Citigroup and Bank of America , who dominate this market.

"Starting next year, it's showtime," said Will Rhode, an analyst at the TABB Group, a research and advisory firm specializing in financial markets.

The swaps business generates an estimated $40 billion in annual revenues for the fixed income divisions of Wall Street banks, but the new rules drawn up after the 2007-09 financial crisis put that number at risk.

The new exchanges - called Swap Execution Facilities (SEFs) - allow clients to trade directly with each other, rather than having to go through the banks. That will open up competition and is expected to lower prices.

"We've been in communication with virtually all of the providers of these platforms," said Jamie McConnel, who works at Chatham Financial, a firm that advises users of swaps about regulation and technology.   Continued...