Throughout the history of the swaps market, there has only been one way to win: you had to be a bank, with offices around the world, trading swaps with a wide range of customers, while offering a long menu of other services.
The problem with that model today is its very first criterion – being a bank means being subject to bank regulation, which is an instant handicap for almost any trading business.
It's also no longer the only model that works, as Citadel Securities proved in 2015. From a standing start, with no clients, and no cross-selling of loans, prime brokerage or research, the Chicago-based firm is now top dog at the world's biggest dealer-to-client swaps venue.
Incumbent dealers argue the two things are connected – Citadel has been a big hit precisely because it is not a bank, and is unencumbered by the accompanying layers of capital rules. That means it can quote tighter spreads.
If you can't beat them, of course, you could copy them.
In the first half of 2014, Credit Suisse was considering something similar: a non-bank swap dealer, using technology from a high-frequency specialist, and backed by third-party capital. At the time, its bigger rivals were a bit sniffy about the idea.
"I don't think this is a winning model," said Daniel Pinto, chief executive of the corporate and investment bank at JP Morgan in New York. "We have considered all the options and I believe the full-service investment bank model is more profitable in the long run."
Citadel's success appears to have convinced some banks to take a fresh look. In the US, law firms have been engaged to test the feasibility of spin-offs for the cleared swaps business, where margins are lower and the decisive advantages are speed, efficiency – and not being a bank. Private equity firms are touted as possible investors and the first deals are predicted for 2017.
The interesting thing about all of this is the sudden diversity of views. Citi and JP Morgan look set to continue as one-stop shops, but the over-the-counter market now seems to have room for other models as well. In a few years' time, the names of the firms that are active in cleared swaps might be very different from those we see today – and might also be different from those offering more exotic products, advisory and solutions; the owners might be banks, prop shops and private equity; the liquidity might ultimately come from a range of sources.
This will come as no consolation for banks, many of which are still cutting back, but the post-crisis years might ultimately be seen as an age of renewal for the swaps industry.