Regulation Helps Exchanges, Hurts Banks

One thing that is certain is that banks will lose out as the market moves out of the shadows and pricing is easier to determine. How much it contributes to the earnings of any specific bank is hard to know because investment banks guard such secrets closely.

One measure of the importance of the market to the banks is staffing levels. One trader at a large bank estimates that the top five CDS dealers have an average of 400 employees globally dedicated to the CDS business, including traders, lawyers and back office employees.

But even if the regulators were not breathing down the banks' necks, Sandler O'Neill analyst Jeff Harte believes the days of CDS as a great profit machine were already numbered. Competitive pressures would probably have opened up the market anyway.

"That's the natural flow of things in the investment banking business and has been for decades," he says "When a product comes out and it's not fully understood or fully standardized it's a much higher margin product, but once it gets to the point where its actively used enough that it can be cleared through an exchange or traded entirely electronically, that's the direction it goes."

>To order reprints of this article, click here: Reprints