WASHINGTON, June 25 (Reuters) - Wall Street banks are set to take a hit from new rules forcing swaps trading onto regulated platforms, a change expected to lower prices and cause further revenue drops, a study showed on Wednesday.
The new rules, which took effect in February and were required by the 2010 Dodd-Frank financial reform law, could cause revenue in the derivatives business to fall by up to 35 percent, the study by consulting firm McKinsey said.
If banks took no further action, this could wipe out their entire profit in that business, the study said.
“It’s a clear call to action ... to really tackle the cost-base,” said Roger Rudisuli, a McKinsey partner, and one of the authors of the report.
Annual revenue from standard interest rate derivatives from the G10 economies could drop by $2.5 billion to $4.5 billion, or 20 percent to 35 percent, the study said. There could also be drops in derivatives in other asset classes.
Swaps are financial contracts that allow companies to shift risk to others, for instance by exchanging fixed interest rate payments for floating ones. Such deals used to be hammered out over the phone between companies and their banks.
But swaps now need to be traded on electronic platforms. Similar shifts have lead to huge drops in prices banks could charge in other markets in the past.
The swaps business - with a total outstanding volume of $710 trillion around the world - is dominated by Citigroup Inc, JPMorgan Chase & Co and Bank of America Corp, Goldman Sachs Group Inc and other large banks.
These banks have been showing sharp drops in their fixed-income business in the past few quarters, a trend that was partially explained by the rise of the new trading platforms - called Swap Execution Facilities - Rudisuli said. (Reporting by Douwe Miedema; Editing by Steve Orlofsky)