The FT published a great special section this past Monday on the state of OTC derivatives reform. Coverage ranged from the impact of MF Global on margin and segregation rules to technology innovation driven by the new rules. What these stories all reaffirm is how much the details of the final rules will impact liquidity, product selection, the growth of electronic trading and what set of tools will ultimatey be most valuable in helping market participants come out on top.
“As volatility alone can cause rapid intra-day deterioration of major counterparty credit quality, a move
towards near-time or realtime clearing is inevitable anyway,” said Kevin
McPartland, fixed income analyst at Tabb Group, in a report last year.
“Some of the most contentious rule proposals are those that will impact
liquidity fragmentation the most,” says Kevin McPartland, [Principal] at Tabb Group.
A few months back we put out a research piece on clearing technology, and how despite a lot of work over the past few years, a big investment is still needed to bring OTC clearing to where it needs to be. And thankfully for those that sell clearing technology, regulations and continued fear of counterparty risk will ensure that investment will in fact happen. The subtitle to the aforementioned report explains the shift in mindset: "Bringing the Back Office to the Forefront".
But one problem is that while the industry knows clearing and transaction volumes will grow, it is unclear by much. Kevin McPartland, an analyst at Tabb Group, the US capital markets consultancy, estimates transaction volumes could increase twentyfold, and market data volumes up to 3-4 times above the current levels.
“As volatility alone can cause rapid intraday deterioration of major counterparty credit quality, a move towards near-time or real-time clearing is inevitable anyway,” said Mr McPartland in a recent report. “OTC derivatives transactions that once took days to clear and settle will be finalised in minutes, if not seconds.”
Despite frequent new promises from Washington that rules will be done by a certain date (“Q4 2011 – oh wait, we meant Q1 2012!”) and major market participants stating their readiness it seams like the OTC derivatives reform process will never end. Who’s fault is it? Everyone’s really. Politicians are trying to get reelected (or reappointed) and market participants are working to ensure they can still make money. But – if we removed the bipartisan politics that slows down everything in Washington we could get to the end game much more quickly.
Kevin McPartland, director of fixed-income research at the Tabb Group, the US capital markets consultancy, said disagreements among agencies and lawmakers were a main source of delay. “From our studies, the industry says it’s as ready as it can be … So to me, the delay is politics,” he said.
Read the full story at FT.com
The articles speak for themselves, so I won’t reiterate what they’ve already said. But in short, the industry is continuing to push for less prescriptive regulations all the while preparing for what is to come.
“The main message we are hearing from the industry is that they should be left to decide how to trade swaps and that the rules not be overly prescriptive,” says Kevin McPartland, director of fixed income research at Tabb Group.
“Despite the unknowns, complexities and costs, the dealer community feels that it is ready for change,” says Mr McPartland. “Yes, lobbying will continue on both sides and politics will persist, but the dealer community sees the advantages of a mostly cleared swaps market.”
My summer’s work was speaking to every major swaps dealer to try and understand what they’re thinking, how they’ll take their business forward and what pending regulation will do to the swaps market. The executive summary of the report that resulted from these conversations can be found here. Today the FT wrote a story to cover my findings.
So although I’m of course happy for the coverage in the FT, the headline they chose (although attention grabbing) I’m not sure is representative of exactly what we found. Yes, dealers do believe liquidity will ultimately improve but with a lot of caveats. Many combinations of RFQ requirements, the 15 second rule, block trade requirements, margin requirements, etc could severely hamper swaps trading and drive the market to futures and cash products. That said, I am optimistic that cooler heads will prevail and we will not have swaps liquidity Armageddon.
The report talks about much more than just liquidity of course, but you’ll have to read it to find out what (are you in suspense yet?).
One last note – I taped a video about this research as well so keep an eye out for that.
Read the study coverage at FT.com.
Now its official – both major market data providers are in the SEF game. Bloomberg showed as “most likely to succeed” in TABB’s SEF Industry Barometer in the spring. But admittedly that study was focused on credit and rates trading whereas Thomson Reuters is in the FX game. Regardless, both of these firms have a lot behind them and as good a chance as anyone to make a run for king of the SEFs.
“As the industry adjusts to the new rules, businesses will be looking to seamlessly integrate with dozens of new touch points including SEFs, clearing houses and swap data repositories while working to stay compliant and profitable in this increasingly automated world,” said Kevin McPartland, a principal and the director of fixed income research at TABB Group.
NYSE announced recently that they’re launching a cloud computing platform aimed at financial services firms. I must admit I think they’re on to something. About a year ago I suggested in a TabbFORUM video that if someone was to create a cloud environment aimed at financial services (ideally with the backing of the relevant regulators) it could be very successful. It seems the NYSE is going in that direction. And as I mention in this article, Silicon Valley seems to have gotten over the credit crisis and now wants to ramp up selling to Wall Street again:
“In the last six months we’ve seen very very strong renewed interest in financial services from big tech firms,” says Kevin McPartland, an analyst at Tabb Group in the US. “It’s like the Silicon Valley-Wall Street partnership.”
This article is a discussion of how information and market data flows in the current OTC derivatives market. Proposed legislation told us that much of this is set to change, although the complexity of some products and the capital required to create them will still leave the major dealers at the center of much of the information flow.
The idea is that forcing banks to spin off their swaps desks would level the playing field and shatter the oligopoly of big dealers. “The [Senator Blanche] Lincoln proposal to spin off swaps desks, a potential proprietary trading ban and far-reaching clearing and execution mandates could be game-changers for the entire market based on the bill’s final wording,” says Kevin McPartland at Tabb.