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Rates survey 2012: Buy side set sights on rates oligarchy

The big players continue to dominate a profitable business line. But some investors are looking to challenge their hegemony by moving into market making as well as proprietary risk taking.

Rates heads at top dealers are quietly confident after the first two trading months of the year. Revenues are well ahead of budget and the trend towards greater market share consolidation by the biggest dealers remains intact. There is even cause for optimism on the regulatory front, as bankers have co-opted politicians outside the US to join them in fighting implementation of the Volcker Rule.

Beneath the surface there are threats to the rates-trading oligarchy, however. The biggest buy-side clients are evaluating ways to cut into dealer profitability, potentially including a move into market making. And probes into interest rate fixing mechanisms such as Libor and Tibor threaten a blow to the reputations of dealers that could undermine customer confidence.

"The year has started very well, people are a little more confident than they have been in the last year or two, and that is playing into the flow we are seeing from real-money accounts coming back into the market," says Harry Harrison, global head of rates at Barclays Capital.

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