How many ways to win in swaps?
Citadel's success – and talk of swap desk spin-offs – suggest era of greater diversity
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.
Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.
To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe
You are currently unable to print this content. Please contact info@risk.net to find out more.
You are currently unable to copy this content. Please contact info@risk.net to find out more.
Copyright Infopro Digital Limited. All rights reserved.
As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (point 2.4), printing is limited to a single copy.
If you would like to purchase additional rights please email info@risk.net
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (clause 2.4), an Authorised User may only make one copy of the materials for their own personal use. You must also comply with the restrictions in clause 2.5.
If you would like to purchase additional rights please email info@risk.net
More on Markets
Barclays disputes CDS committee decision ahead of auction
Representing the bank, law firm Milbank argues the committee’s approach risks constraining the market and goes against expectations
How Risk.net’s robots unlocked Ucits trade data
Machine learning tool helps reveal the largest European derivatives users – and who they trade with
Pricing and funding woes hit gilt repo
QT-driven funding cost rises combined with clients’ price demands see at least two banks pull back
China set to extend NDF trading scheme for onshore banks
CFETS expected to introduce RFQ functionality and more currencies for non-deliverable forwards
New data reveals Pimco is top Ucits interest rate swaps user
Counterparty Radar: US managers and dealers reign supreme in European retail fund space
Goldman appoints new financial risk head
Promotion sees Josh Schiffrin oversee strategy and financial risk, including trading supervision
Another post-Libor rate aims to clear Iosco bar
After two rivals were slapped down by the benchmark overseer last year, will Axi fare differently?
Crypto options need more principal market-makers – GS trader
Absence of risk warehousing market-makers holding back options development, says GS crypto trader