May 4, 2012 / 4:08 PM / 6 years ago

Goldman Sachs eyes CDS trading with platform

LONDON (Reuters) - Goldman Sachs (GS.N) may extend its new bond trading platform to cover other fixed income products such as credit derivatives after it starts trading corporate bonds this month, sources close to the firm said on Friday.

The New York-based investment bank plans to launch in the coming weeks an electronic bond trading system called GSessions.

But a source close to the firm said on Friday the bank may extend the system’s coverage to other asset classes, specifically credit default swaps (CDS), in a later version.

“Credit derivatives could be applicable. Corporate bonds and CDS tend not to be traded electronically, unlike some other OTC products,” said the source.

Investment banks use third-party systems from exchanges or brokers to transact bonds but trading firms are looking to bring more of this business in-house to counter regulatory reforms.

Goldman has been developing GSessions for the past year in the hope of attracting client orders by enabling them to execute large bond trades more cheaply.

A move to launch a credit derivatives trading platform would pitch Goldman into competition with trading platforms such as MarketAxess and ICAP’s IAP.L BrokerTec.

BlackRock, the money manager owned by PNC Financial Services Group Inc (PNC.N) and Barclays Plc (BARC.L), also plans to launch a corporate bond trading system in the United States, pending regulatory approval.

The firm’s (BLK.N) Chief Executive Laurence Fink said two weeks ago the system was not meant to rival Wall Street’s fixed-income brokers.

    Rather, Fink said, the trading platform was aimed at filling a gap in trading that might occur if Wall Street firms and major banks reduce their participation in bond trading.

    “We are responding to the regulatory regime that is transforming the future ways of the business,” Fink said.

    The Goldman and BlackRock launches are designed to garner bond liquidity as banks look set to cut back on bond trading to meet new capital standards from regulators and trading limits like those in the Volcker rule.

    The Volcker Rule, part of the far-reaching Dodd-Frank Act, plans to outlaw investment banks, such as Goldman and rivals like JP Morgan (JPM.N) and Morgan Stanley (MS.N), from placing bets in the fixed income market, known as proprietary trading.

    The reform will likely force banks to hold smaller inventories of fixed income instruments, which will likely impact liquidity and cut trading activity.

    Editing by David Cowell

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