BTG (LSE:BGC)
Historical Stock Chart

From May 2019 to May 2024

Interdealer broker BGC Partners Inc. (BGCP) sees central counterparty clearing boosting banks' credit derivatives trading activity, which has been sapped by the financial crisis.

Clearinghouses for credit default swaps, just beginning operation after calls from regulators and market participants to reduce systemic risk in the $28 trillion market, also are seen driving increased electronic trading of the instruments.

"Historically, when a product goes centrally cleared, you see an increase in trading velocity," said Jeffrey Hogan, managing director and head of business development for BGC Partners, in an interview with Dow Jones Newswires.

Credit products represent about a quarter of New York-based BGC Partners' revenue and earned the company $307.5 million in 2008, up 34% from the prior year thanks to increased electronic trading of the instruments in Europe.

The company is scheduled to report first-quarter results May 7.

BGC Partners, which facilitates inter-bank trading in credit, foreign exchange and interest rate products, is battling GFI Group (GFI) and Icap plc (IAP.LN) for a piece of a market damaged by the financial crisis.

However, Hogan said he sees some recovery at hand. The Depository Trust and Clearing Corporation, the New York-based clearing entity, estimated the size of the credit derivatives market at $28.2 trillion last week, ticking higher as efforts to reduce the notional size of the market continue.

Trade compression has slashed the outstanding value of CDS trades from $55 trillion last year, while trading activity slumped following the near-collapse of American International Group Inc. (AIG), feeding systemic risk fears.

Hogan said he expects the overall number of transactions will continue growing as counterparty risk concerns ease and trade resumes in index-based credit derivatives, though the market in single-name swaps will remain suppressed until these can be cleared.

Most credit derivatives clearing platforms are beginning with index products, putting off the more complex single-name products until terms are standardized.

Hogan said the advent of central clearing already is driving more electronic CDS trading in the United States, where participants have been slower than European counterparts in moving away from the standard phone-brokered deals.

Key to reviving credit derivatives trading will be resolving regulatory uncertainty, and Hogan said lawmakers' talk of mandated clearing for the swaps has been muted by the recent launch of clearing entities on both sides of the Atlantic.

Participants also want to see how much it will ultimately cost to route trades through clearinghouses, Hogan said.

The dealer bank community have the deciding vote in the race among exchanges' CDS clearinghouses, according to Hogan. Atlanta-based IntercontinentalExchange Inc. (ICE) won the banks' support in the United States, which he said gives ICE an edge in Europe, where the exchange looks to launch a separate clearinghouse in July.

Once clearing for credit derivatives takes hold on both sides of the Atlantic, Hogan said dealer banks will push for more clearing of interest rate swap trades and securities lending transactions.

-By Jacob Bunge, Dow Jones Newswires; 312-750-4117; jacob.bunge@dowjones.com