By Katy Burne
State Street Global Markets has signed on as a member of CME
Group Inc.'s (CME) clearinghouse for off-exchange derivatives
called swaps.
The move adds another nonbank to CME Clearing's membership
roster for interest-rate swaps and comes on the heels of Newedge
USA being approved as a rate-swaps-clearing member by CME Aug.
16.
State Street was admitted as a clearing member for rate swaps
Aug. 24, but had been a member for futures and options clearing
since 2009.
CME has 20 banks as members of its interest-rate-swaps
clearinghouse; these firms stand between their customers and the
clearinghouse, guaranteeing the obligations of clients for a fee
and contributing to the clearinghouse's default fund, used as a
last resort when members fail.
What makes State Street's addition noteworthy is it is the first
addition of a custody bank that doesn't also have an internal
trading desk; the firm unwound its rates-trading desk in the
spring.
Banks had pushed for every member of swaps clearinghouses to be
able to participate in default firedrills and other risk-management
exercises, but CME allowed State Street to outsource participation
to third parties. State Street declined to name those firms.
BNY Mellon Clearing has been a member of CME Clearing since
August last year, but the firm has trading desks in addition to
acting as both a custody bank and clearing agent or "futures
commission merchant."
Charley Cooper, senior managing director at State Street, said
in an interview the firm has refocused its efforts on businesses
like clearing, custody and execution technology that are expected
to benefit from the 2010 Dodd-Frank financial-overhaul law.
Already, he said, customers were voluntarily clearing swaps for
better risk management--ahead of new regulations that soon will
force them to do so.
Under Dodd-Frank, the majority of swaps will have to be traded
on open platforms like registered exchanges or alternatives called
"swap execution facilities" or SEFs, and be routed through central
clearinghouses.
State Street has a swap-execution facility called SwapEx in the
works. Once the U.S. Commodity Futures Trading Commission finalizes
the rules for SEFs, State Street can apply for SwapEx to have that
designation.
Mr. Cooper said State Street is planning to have a full solution
for clients starting with its execution platform SwapEx, its
clearing service as a member of CME's clearinghouse and finishing
with its back-office valuation and custody business. That should
help State Street once banks no longer can bundle business from
their trading desks and clearing businesses under the law, he
said.
"When the electronic-trading mandate kicks in, the synergies
[banks] currently offer between trading and clearing will break
down," said Mr. Cooper.
Write to Katy Burne at katy.burne@dowjones.com
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