Banks more open to futures as derivatives rules set in

CHICAGO Thu Nov 1, 2012 12:30am IST

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CHICAGO (Reuters) - Large banks are becoming more supportive of some futures contracts that they have previously failed to back, as new rules designed to reduce the risks of privately traded derivatives draw more investors towards exchange-traded products, some exchange heads said on Wednesday.

Many of the world's largest banks that dominate the $648 trillion privately traded derivatives markets have been resistant to attempts to launch competing listed products, in order to protect lucrative profits associated with their effective oligopoly in over-the-counter credit, interest rate and equity derivatives markets.

That mentality, however, is starting to change as the markets evolve in the face of new international rules that will increase margin requirements against over-the-counter contracts, making them more costly to trade.

Some futures products in the past had been seen as "too threatening" to the over-the-counter derivatives businesses of banks, however "the market has evolved since then," said Andreas Preuss, chief executive at Frankfurt-based exchange Eurex, a unit of Deutsche Boerse (DB1Gn.DE), at a futures industry event in Chicago.

Phupinder Gill, CEO at Chicago-based CME Group (CME.O), used bank support for its impending launch of futures on interest rate swaps as an example of the new openness to some products.

"Many of the large banks that never supported these innovations are going to be market makers for us on day one," he said at the same event.

Citigroup (C.N), Credit Suisse (CSGN.VX), Goldman Sachs (GS.N), and Morgan Stanley (MS.N) are among the banks that will make markets in the contracts set to launch on November 13, the CME said last month.

Other rules aimed at bringing greater price transparency to the over-the-counter contracts and help draw new participants to the markets are expected to make much of the privately traded markets more like the futures industry, a change some market participants have dubbed as the "futurization" of swaps.

Finbarr Hutcheson, Chief Executive Officer of NYSE Liffe NYX.N, said, however, that not all market evolution under new regulations will be in the direction of futures-style contracts, and that some rules may push more activity to swaps, depending on factors including tax considerations.

(Reporting by Karen Brettell; Editing by Tim Dobbyn)

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