Exchange Traded Credit Derivatives Likely to Hurt Investment Bank Earnings

Top investment banks like Morgan Stanley, Deutsche Bank and Goldman Sachs are at risk of losing billions of dollars when exchanges begin offering credit derivatives next year. Several indexes including the NYSE-owned Euronext, the Chicago Mercantile Exchange, the Chicago Board Options Exchange and the Frankfurt-based Eurex AG plan on offering trades in credit default swaps and other credit derivatives alongside stocks and commodities. The exchange offerings have the ability to really hurt bank profits - for example Deutsche Bank earned more than $3 billion from credit derivatives in the first half of this year, a third of its total revenue from financial markets during that period. Exchange-traded credit-default swaps will mean these banks will now have to share fees though the firms will continue to control the most lucrative part of the business - building credit derivatives to meet the needs of their clients.
• Sources: Bloomberg, Bob's Guide
• Potentially impacted stocks and ETFs: NYSE Group (NYX), CBOT Holdings (CBOT), Chicago Mercantile Exchange (CME), Goldman Sachs (GS), Morgan Stanley (MS), Deutsche Bank (DB). ETFs: iShares Dow Jones US Broker-Dealers Ind. (IAI), Vanguard Financials (VFH), Financial Select Sector SPDR (XLF), iShares Dow Jones US Financial Svc. (IYG)

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