State Street has announced plans to close its over-the-counter swaps clearing business early next year, and will abandon plans to launch a European clearing operation. The firm, which had tipped the clearing business as a potential revenue enhancer as recently as early this year, noted that market and regulatory changes have made it unattractive.
The company issued a statement saying, “Our clients have largely evolved their investment strategies towards the use of futures and away from the use of over-the-counter (OTC) derivatives.” State Street follows RBS and BNY Mellon in pulling out of the clearing business. However, it expects its futures business will benefit from the market realignment toward listed products. In its statement, State Street said, “Our futures execution and clearing business remains a key priority, which is demonstrated by the recent build out of our execution desk in the US and EMEA.”
One of the trends this year in rates hedging has been the so-called “futurization” of swaps. Not everyone expected swap futures products to take off, since in the past, most of these vehicles were strangled in the crib by banks fearful of losing lucrative business to exchanges. However, with banks now constrained by capital issues on bilateral deals, and facing uncertainty regarding intraday margin exposures on cleared transactions, there is now much less opposition to the development of swap futures markets.
State Street’s withdrawal shouldn’t put much of a crimp in the OTC clearing landscape, since it was not a particularly big player. Nonetheless, it offers more evidence of firms’ changing expectations for revenues from this business line since the beginning of the year.