The slow regulatory process has its first known victim. As soon as Dodd-Frank made swap execution facilities official, entrepeurial swaps traders everywhere thought they better hurry up and start one. But as we’re seeing only those with deep enough pockets to keep operating for months (or years) with virtual no profit until regulations are in place will survive. I spoke with Diamond OTC maybe 6 months ago – although their differentiation strategy wasn’t completely obvious, its still a shame to see innovation stifled by politics.
“Because there is so much uncertainty as to the timeline of the rules, everyone has to have really deep pockets to last out the time until the rules are finalized,” said Kevin McPartland, principal and director of fixed-income research at TABB Group.
A TABB study in April concluded that SEF consolidation would likely begin within two years of the Dodd-Frank rules being implemented, ultimately leaving about three or four SEFs per asset class.