The world's top brokers face a fight to hold onto hundreds of millions of dollars of revenue this year when U.S. legislation throws open the vast swaps trading market to stock exchanges.
Brokers like ICAP and BGC Partners make around a third of their revenue from the $640 trillion industry for trading swaps - financial instruments used by companies to cover their exposure to changes in interest rates, foreign exchange rates and credit ratings.
Exchanges like CME Group, NYSE Euronext and the IntercontinentalExchange, meanwhile, dominate the much smaller market for futures, which give similar protection, but are more standardized and so tend not to offer exact cover.
However, new U.S. swap rules enshrined in the Dodd-Frank Act, due to be finalized in the coming weeks and take effect in the middle of this year, could drive business to the exchanges and away from the brokers, and reshape the industry globally due to the size of U.S. markets and the power of their regulators.
"It is going to be tough for the brokers. The exchanges are huge with deep pockets and they are not the types of companies you'd want invading your space," said Simmy Grewal, a senior analyst at research house Aite Group.
Swaps trading involves brokers matching buyers and sellers in murky over-the-counter (OTC) markets. It has historically been less tightly regulated than futures trading on exchanges.
U.S. regulators want to drive swaps trading onto electronic platforms, like those run by exchanges, to make it more transparent and easier to regulate, and to protect the global financial system from problems that arose after the collapse of U.S. bank Lehman Brothers, one of the largest swaps traders.
These changes will effectively see brokers and exchanges starting to compete directly for swaps business later in 2013, with exchanges eager to grab a chunk of a huge market.
According to the Bank for International Settlements, the swaps industry was worth $639 trillion at the end of June 2012, compared with$25 trillion for futures trading.
The world's top five brokers - GFI, Tradition and Tullett Prebon as well as ICAP and BGC - made a combined $2.7 billion, or 35 percent,of their revenues in their last full financial years from interest rate swaps,the most common type.
The exchanges have hinted half the swaps market could be up for grabs under Dodd-Frank, which, if true, could see hundreds of millions of dollars in revenues moving to them from brokers.
The U.S. Commodity Futures Trading Commission (CFTC) wantstwo new categories of regulated markets called Swap Execution Facilities (SEFs) and Designated Contract Markets (DCMs).
Brokers are likely to trade swaps through SEFs, while the exchanges are set to offer swap-like futures as DCMs.
Analysts are reluctant to estimate the extent of likely broker losses at this stage but early research suggests the reforms will have a significant impact.
Three-quarters of respondents to a Berenberg Bank survey in July predicted the reforms would cut OTC trading levels by up to 30 percent while one in eight saw regulation reducing swaps trading by between 31 percent and 50 percent.
In a note published in November, Morgan Stanley analysts flagged potential risks to the world's largest swap broker, ICAP, which in its last financial year made 681 million pounds ($1.1 billion), or about two fifths of its revenue, from interest rate swaps.
"The greater certainty in the futures model ... will favor futures over swaps, leading to cannibalization of the swaps market," they predicted.