State Street To Cease Swaps Clearing In 2015

State Street has confirmed from early next year, it will shut down its U.S. swaps clearing business and will not launch a European over-the-counter (OTC) clearing unit.

The exit from the space makes the State Street the latest global custodian to fall victim to regulation.

“Due to market and regulatory factors, our clients have largely evolved their investment strategies towards the use of futures and away from the use of OTC derivatives,” says a spokesperson for the bank.

“This means we will not launch OTC clearing in Europe and will cease our OTC clearing operations in the U.S. early in 2015 subject to client contractual commitments.”

State Street opened its U.S. swaps clearing business in 2011 as it hoped to profit from the (then incoming) Dodd-Frank Act. In 2013, it announced it will clear interest rate swaps using LCH Clearnet’s SwapClear service.

Instead, State Street will focus its strategy on the execution and clearing of exchange-traded futures contracts.

“Our futures execution and clearing business remains a key priority, which is demonstrated by the recent build out of our execution desk in the U.S. and EMEA,” adds the spokesperson.

The decision by State Street comes after BNY Mellon decided to close its European exchange traded and OTC derivatives clearing unit as a result of the delay in mandatory clearing. It also shut its U.S. swaps clearing business last year, citing it had not been profitable and incurred substantial funding charges over the last couple of years.

As a result of incoming capital rules, specifically leverage ratios, set out in Basel III, it is becoming more costly for banks to carry out trading and clearing in OTC derivatives.

According to report published by research consultancy TABB Group in October, banks that offer OTC clearing services are at a “crossroads” because fees and volumes have disappointed given the additional complexity of swaps against futures contracts.