Banks Poised to Reduce Rate-Swap Trading

Dealer revenue could plunge 45 percent amid new rules, Tabb Group estimates.

Dealer revenue from negotiating interest-rate swap transactions is poised to plunge about 45 percent as new rules boost trading costs, pressures that may prompt banks to participate less in the $633 trillion over-the-counter derivatives market, Tabb Group LLC estimates.

Banks collect about $3.25 billion a year from trading rate swaps with their customers, Tabb said. That revenue will shrink to $1.8 billion in 2014 as most transactions shift to public markets, according to a research report meant for Tabb customers that Bloomberg News obtained. Dealers will also need to hold more capital to back trades, boosting expenses, said Will Rhode, who wrote the report.

Clearing Shift

Swaps dealers currently get about 95 percent of their revenue from trading fees and from profiting off the difference between bid-ask spreads, Rhode said. The remaining 5 percent comes from fees associated with clearing. The latter figure will quadruple because bank customers will be required by law to clear their trades, while the former declines as spreads narrow, he said.

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