Last week we learned that ISDA decided they would endorse DTCC as the swaps data repository for interest rate products, essentially shutting down the repository created by TriOptima only a year or so ago. I love competition to spawn innovation and lower prices as much as anyone, but in this case I think the best thing for the market is to have all of this swaps data in one place. Its also the best thing for me the analyst who loves to pull this data down off the web to decipher what’s going on in the market. From a recent Bloomberg article:
“I would argue that swaps-data repositories are one area where a monopoly might not be such a bad thing,” said Kevin McPartland, a senior analyst in New York with Tabb Group, a financial markets research and advisory company. In a crisis, regulators need to immediately see swap positions and connections between trading partners, and fragmenting the data may hinder access, he said.
Unfortunately you need a login to access this story, but see the full article here.
It seems regulators are again after the evil dealers. Since dealer to dealer trading accounts for most of the volume in the CDS market, and the dealers all invest in Markit, they must be doing something wrong – right? I just can’t see how this case has any merit, nor does the timing of the antitrust case make sense. When I first read the headline I thought it was going to be a fraud thing – but upon realization that is was about competitiveness I was confused. With huge OTC derivatives reform happening around the world that presumably will open up the market to more competition (we’ll save that issue for another day), why bring an antitrust suit now? If an oligopoly really does exist won’t derivatives reform end it anyway?
“The undertones through this whole process have been to take power away from the big banks,” said Kevin McPartland, a senior analyst with Tabb Group in New York. “This seems like another sort of attack on the banks.”
The CFTC is thinking about extending some of its proposed margin rules for OTC derivatives clearing to the futures market. The part that matters here is if they require FCM’s to segregate margin for each client rather than pooling into one big account. If FCM’s can no longer get (and pass on to their clients) the benefits of netting out client positions to limit margin requirements, costs will go up for clients and the value of the FCM could be limited to simply providing market connectivity – a commodity these days.
“In the best case, it would cost the FCMs a lot of money, and in the worst case it would kill the FCM model completely,” said Kevin McPartland, a senior analyst with Tabb Group, a capital-markets strategic advisory and research firm in New York.
It seems SEF consolidation has already begun, even though SEFs are technically yet to exist. I think this kind of consolidation is inevitable, and it seems the exchange merger mania will only add fuel to the fire.
The new rules will force consolidation among derivatives brokers and “once all is flushed out and done, you’ll have some people completely disappear and others will merge,” said Kevin McPartland, a senior analyst with Tabb Group in New York.
I’ve spoken quite a bit about latency metrics and latency transparency in the past few months including conversations with both Corvil and Correlix. It seems there is a race on between those providers to bring on as many exchanges as possible to enhance the value of their product offering. Corvil works with Deutsche Borse and NYSE while Correlix has been working with Nasdaq. This article talks about Correlix’s recent deal with DirectEdge – the most newly minted equity exchange in the US.
The market for the kind of tool Correlix offers has grown considerably over the last three years, according to Kevin McPartland, an analyst for Tabb. Another boost for the market may come if regulators insist on transparency in the area of latency, the time it takes for an order to travel to an exchange, be executed or canceled, and then for the confirmation to reach the source.
“There was a lot of talk on that a few months ago,” McPartland said. “This technology is creating more transparency on how markets work and interact with one another.”
Some think its too much and some think its too little. Either way the proposals don’t seem good for the market and its feeling more and more like the resulting rules will push business off shore.
The market-making exemption will have little effect on how banks use swaps to place trades betting on the direction of markets, said Kevin McPartland, a senior analyst at research firm Tabb Group in New York.
“Since so much of OTC derivatives trading by banks can be considered market making or hedging, both of which will presumably be exempt from any Volcker Rule, TABB Group believes the impact on the OTC derivatives markets would be minimal,” he said. “This has gotten to a point where this is all about politics and not market structure, which should be the focus.”
The OTC derivative reform debate has clearly moved from one over market structure to one over politics. Whether one is a Republican or Democrat should have nothing to do with determining the best market structure going forward – but I’m not so naive. From the story:
“Lincoln’s bill has made the situation much more contentious than it already was,” McPartland said in a telephone interview.
SunGard took its BRASS sell side OMS and combined it with the recently purchased GL Trade to make their new platform, called Valdi. Sungard will be their toughest competition, with those unwilling to spend the time to swap out their existing system second toughest:
“This allows the SunGard platform to give customers quick access to a variety of markets around the world,” said Kevin McPartland, a senior analyst with Tabb Group, a research firm in New York. “Firms that focused only on U.S. equities have expanded to other asset classes,” he said. “If the customers of brokers want to trade other markets, sell-side OMSs have to support that.”
A tightening up of end user exemptions would have more hedge funds falling under proposed capital requirements and OTC derivative clearing and execution mandates. This language is up for quite a fight in the Senate still, as the definition of “Major Swap Participant” will have major implications for the financial markets post-reform, but it seems certain at least some of the biggest hedge funds will fall under the umbrella. Question is does the Lincoln bill take things to far? I think so:
“They’re trying to get the hedge funds that are big parts of the market but off the public radar,” Kevin McPartland, a New York-based senior analyst for the Tabb Group, a research and advisory firm based in Westborough, Massachusetts, said in an interview today.
The provision targets hedge funds without addressing the systemic risk that led to the 2008 financial crisis, McPartland said.