Swaps D-Day to Trim Dealer Profits

Move to clearinghouses means dealers have to post collateral.

The $639 trillion over-the-counter derivatives market begins the largest transformation in its 30-year history today with rules intended to contain another financial crisis, trimming profits for Wall Street banks.

Companies from JPMorgan Chase & Co. to BlackRock Inc. are now required under the 2010 Dodd-Frank Act to have most of their privately negotiated swaps trades backed by a clearinghouse that’s capitalized by the world’s largest banks. That means dealers and their customers have to post upfront collateral to absorb losses if a firm defaults and settle daily losses.

Skipping Florida
Two of the executives said they aren’t traveling to Boca Raton, Florida, this week for the Futures Industry Association annual conference so they can be in New York in case problems occur.

Officials at two other major dealers said that while they aren’t worried about today’s deadline, they are concerned their systems will be stressed in June when a larger number of firms, including banks, insurance companies and smaller hedge funds, are required to clear their swaps trades.

‘On Board’
While the New York Fed prodded JPMorgan, Deutsche Bank AG, Goldman Sachs Group Inc. and other dealers into clearing more than 90 percent of eligible inter-bank trades by the end of 2009, their clients resisted on concern that the potential added costs would outweigh benefits.

“What’s new here is clients are getting on board,” Niamh Alexander, an exchange analyst with KBW Inc. in New York, said in a telephone interview. She noted that dealers have been clearing interest-rate swap trades among themselves at LCH.Clearnet since 1999 and credit swaps at Intercontinental Exchange since 2009.

Credit Benchmarks

Rate swaps in four currencies -- U.S. dollars, euros, British pounds and Japanese yen -- must be cleared, as well as contracts on benchmark credit-swaps indexes in North America. The CFTC on Feb. 25 delayed the start of mandatory clearing for Markit iTraxx indexes tied to European companies.

Global Spreads

Spreads on company bonds from the U.S. to Europe and Asia tightened 3 basis points to 144 basis points, or 1.44 percentage points, in the period ended March 8, according to Bank of America Merrill Lynch’s Global Corporate index, which reached 142 on Jan. 10, the least since April 2010. Yields rose to 2.68 percent from 2.61 percent on March 1.

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