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JP Morgan Chase & Co (NYSE: JPM), the second largest U.S. bank in terms of assets, could lose as much as $3 billion in revenue if most derivative trades are moved to exchanges, according to a Sanford C. Bernstein & Co analyst.

Derivatives traders profit on the gap between what they charge customers and what they pay to hedge the trades on what is called a “bid-ask spread.” Banks can charge more on derivatives that are not actively traded or are being customized for the seller. The more actively traded contracts have more transparent pricing and lower spreads.

One analyst said that banks have more of an ability to get bid-ask income because there’s a certain financing relationship between the bank and their customers, but if the product moves to an exchange, that relationship is gone and banks financing flexibility is hampered.

In the massive over-the-counter derivatives market for all U.S. commercial banks dealing with OTC derivatives contracts, 97% of contracts in terms of value is handled by just 5 dealers, 4 of whom are TARP recipients: JP Morgan Chase, Goldman Sachs, Bank of America, Citibank and HSBC.

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