Corporate End Users Unfazed by Derivatives Reform

Earlier this year we spoke with just shy of 400 corporate treasurers about their use of interest rate derivatives.  Given this group of IRD users isn’t covered as closely from a market Treasurerstructure perspective as financial end users, I was excited to see what trends we could find within the interview responses.  So with the help of my team we began looking through the results and found – well – not all that much.  In fact the most interesting story that emerged was how little has changed.  Asset managers et al have been a whirlwind tour of market structure reform since 2009 yet corporates seem to be continuing on as if very little has changed.  Greenwich Associates Market Structure and Technology clients can download the full report here.  The overview of our findings is below:


Monday, June 16, 2014 Stamford, CT USA — Regulations are having little to no impact on corporate use of, and dealer selection for, trading interest-rate derivatives, according to research from Greenwich Associates.

The proposed G20 derivatives market reform measures were intended to reduce systemic risk in part by diluting big dealers’ share of the OTC derivatives markets. While the results of the Greenwich Associates research show some hints of movement in this direction by financial end-users, especially those in the United States, there is been no impact for global corporate treasurers.

Corporate users of interest-rate derivatives globally continue to concentrate over three-quarters of their business with their top three dealers and over 40% of that volume with a single primary dealer. This continues a pre-reform derivatives market trend for corporate end-users, who have concentrated 75–80% of their business with their top three dealers over the past eight years.

This is in large part because swaps clearing and trading mandates have yet to impact the corporate end-user community.  This immunity to change will be short lived however.  “A higher risk weighting for banks trades done bilaterally—even when the customer is exempt from clearing rules—will force banks to raise prices for corporate end user clients. ” says Kevin McPartland Head of Research for Market Structure and Technology at Greenwich Associates.

Conversely, among financial end-users (i.e., asset managers and hedge funds), a shift toward a more diverse dealer list for interest-rate derivatives has begun—although only in the United States, where derivatives reform is furthest along. The average number of dealers used to trade interest-rate derivatives by financial end users is up 15% from 2007 to 2014. Trading is also less concentrated than it was it 2007—on average an investor’s top dealer is seeing 29% of flow, down from 38%, and the top three dealers are seeing 64% of  flow, down from 72%.

“The big dealers are still critical to the market’s functioning, but the changing market structure is causing those initially affected—U.S. asset managers and hedge funds—to diversify their counterparty mix,” says Kevin McPartland.  “This trend will work its way to corporate derivatives users in the coming years, but as our research shows, that time has not yet arrived.”

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