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March 4, 2014 4:18 pm
State Street Corporation, the US financial services group, is poised to begin trading futures for rival institutional investors, in a move that may curb investment banks’ role as intermediaries in trading.
The group’s trading arm, State Street Global Exchange, is set to trade listed derivatives on global exchanges as an agency broker in coming weeks. It is building up its trading desk and testing its systems.
Its move puts it into competition with rivals such as BNY Mellon and underscores how traditional trading relationships in financial markets are shifting amid tougher regulation that is changing industry economics.
Many banks are faced with more stringent rules about using their balance sheets to support derivatives trading, potentially limiting the services some investors will receive. In recent months many banks have also cut jobs in fixed-income trading amid falling revenues and stricter regulatory capital rules.
At the same time many long-term investors and pension funds are facing greater pressure to demonstrate they are getting the best possible price for their trades, forcing them to consider alternative and outsourced trading services.
State Street wants to use its custodian banking business to grab more operations traditionally taken on by investment banks, as it will be able to use collateral placed by other fund managers at the bank to fund more derivatives trades.
Custodian banks act as intermediaries between investors and banks to clear derivatives. A clearing house stands between two parties in a trade, ensuring the deal is completed in the event of a default.
Charley Cooper, senior managing director, State Street Global Exchange, Trading & Clearing, said its move was dictated by customer demand.
State Street wants to use its custodian banking business to grab more operations traditionally taken on by investment banks
“You’re seen as a safer bet than the traditional sellside,” he said. “We are a substantially better credit risk. This way is an alternative to trading from the sell side, who also have a proprietary position.”
State Street’s parent company has an ‘A+’ at Standard & Poor’s, giving it a higher rating with the agency than banks such as Barclays, Deutsche Bank and Credit Suisse. Financial institutions can use their high credit ratings to cut the cost of financing securities.
Rivals such as BNY Mellon have also pushed into the market, hiring traders to deal in fixed income markets. Mr Cooper said the group would act as an agency broker, trading for clients and taking no proprietary risk on deals.
The group’s decision to begin trading futures marks the group’s latest foray into the derivatives market infrastructure. In recent years it began a swaps clearing service to advantage of sweeping reform of the over-the-counter (OTC) derivatives markets. However, Mr Cooper said there were no plans to begin trading swaps as yet.
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