Swaps Clearing Revenue Could Match Energy Rise, Analyst Says

Revenue growth for swaps clearinghouse owners will take more time to materialize than previously thought, though longer-term it could match the increased sales of up to 27 times seen in energy clearing, according to Keefe Bruyette & Woods.

CME Group Inc. (CME), Intercontinental Exchange Inc. and Nasdaq OMX Group Inc. (NDAQ) will be likely beneficiaries of changes mandated by the Dodd-Frank Act to the $601 trillion over-the-counter derivatives market, Niamh Alexander, an analyst with Keefe Bruyette in New York, wrote in a note to clients yesterday. While progressing slower than she thought, the changes should bring new entrants to the market and increase sales, she said.

“The progress is slow but definite,” Alexander said in a telephone interview today. “The train’s left the station and we’re moving toward clearing.” She said by 2016 the legislation could increase clearing revenue for interest-rate, credit- default, foreign exchange, equity and commodity OTC products by $830 million to $1.2 billion. “The opportunity is real, it just keeps getting pushed back.”

The analyst compared the growth potential to energy swaps clearing. She estimated that revenue from processing crude oil and natural gas swaps with a clearinghouse soared more than 27 times for CME Group and jumped nearly 9 times at Intercontinental Exchange from 2003 to 2010.

Clearinghouses, which are capitalized by their members, lessen the effects of default of users such as banks by collecting daily margin, monitoring positions and standing between buyers and sellers. Most swaps will have to be processed by clearinghouses under mandates in Dodd-Frank.

New Rules

The Commodity Futures Trading Commission and Securities and Exchange Commission are leading efforts to write rules to reduce risk and boost transparency in swaps trades by firms including Deutsche Bank AG, Barclays Plc (BARC) and Cargill Inc. Dodd-Frank was signed by President Barack Obama in July 2010 after trades in the unregulated swaps market helped fuel the 2008 credit crisis.

“We have lowered our estimate of the clearing opportunity in the near-term as the rule-writing and implementation process is moving more slowly than we expected,” Alexander wrote in the note. She also said CME Group is in danger of missing an opportunity to gain business in interest-rate swap clearing as the regulation process drags on “and competitors have time to launch their own interest rate clearing offerings in the U.S.”

CME Group, based in Chicago, currently offers clearing of interest-rate, credit-default and energy swaps, among others. Atlanta-based Intercontinental Exchange offers credit-default and energy swaps clearing. Nasdaq, based in New York, offers interest-rate swap clearing.

LCH.Clearnet Ltd., based in London, owns the world’s largest interest-rate swap clearinghouse.

Intercontinental Exchange and the New York Mercantile Exchange, now owned by CME Group, started clearing energy swaps after the bankruptcy of Enron Corp. shook investors’ faith in trading partners.

To contact the reporter on this story: Matthew Leising in New York at mleising@bloomberg.net.

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net.

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