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) -- In what's shaping up to be a competitive market for derivatives clearing,

Wells Fargo

(WFC) - Get Wells Fargo & Company Report

announced Monday that it's pairing with

CME Group

(CME) - Get CME Group Inc. Report

to clear over-the-counter derivatives trades.

The financial reform bill passed into law last summer requires financial firms to clear derivatives trades on a central exchange. The move was intended to provide more transparency on pricing and activity in the largely unregulated derivatives market and to reduce systemic risk by making risk shared on an exchange, rather than concentrated in individual trades.

Since then, large banks and existing exchanges have been battling for market share as they work with regulators to hammer out new rules. CME chief competitor,

Intercontinental Exchange

(ICE) - Get Intercontinental Exchange Inc. Report

, seems to have a leg up in the battle, having teamed with the world's largest derivatives players.

Among those reportedly working with ICT are

JPMorgan Chase

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Bank of America

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Goldman Sachs

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Morgan Stanley



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Deutsche Bank

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(UBS) - Get UBS Group AG Registered Report


Credit Suisse

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has teamed with smaller players that include trust banks like

Bank of New York Mellon

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State Street

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and small brokerages like

MF Global



Big banks are trying to gain an edge as the go-to houses for derivatives trades, establishing relationships with major clients, particularly as pricing is about to become more transparent.

For instance, Goldman, which announced a new clearing business after the reform bill passed, has seen its share of derivatives business decline, according to the most recent report from the Office of the Comptroller of the Currency. So has JPMorgan Chase, which still ranks as the top derivatives player. Meanwhile, Bank of America, which also announced the formation of a derivatives clearing group last year, has gained significant business.

The notional size of the U.S. derivatives market alone is $234.7 trillion, with JPMorgan, Citi, Bank of America and Goldman controlling 95% of the market. Wells Fargo ranks as number six on the list of biggest derivatives players in the U.S. market, according to the OCC. It had $3.9 trillion worth of derivatives exposure, vs. JPMorgan's $77.75 trillion.

Over-the-counter derivatives make up the lion's share of those trades, in forward contracts, swaps, options and credit derivatives. The OTC derivatives market is the most opaque and arguably the riskiest because the trades are created to meet individual customers' specific needs. The credit-default swaps that brought

American International Group

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to the brink of destruction and led to a $182 billion bailout, for instance, were OTC trades.

"Selecting the CME as our OTC interest rate derivative clearing solution will allow Wells Fargo to reduce risk in the financial sector while meeting its regulatory obligations," Paul Rettig, head of technology, operations and compliance for Wells Fargo Securities, said in a statement.

-- Written by Lauren Tara LaCapra in New York


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