Buyside confused over OTC regulation

Interesting article by Phil Davis in the FT today (registration required) about asset managers being required by Dodd-Frank to clear trades through a central counterparty. The article quotes David Field of Rule Financial. Rule have apparently conducted a buy-side survey which confirms several of the consensus opinions of the Clearing and Settlement Working Group (CAS-WG) (which I blogged about last week).

Field said:

The buyside is very confused about the timelines. We conducted a survey on this and answers ranged from September 2012 to December 2014. One even said December 2015.

The article concludes that the buy side is unaware of the timeline and is also unprepared for having to post collateral on deals for the first time.

Interesting read.

Inaugural Clearing and Settlement Working Group meeting

Paul Blank and I spent yesterday afternoon in the comfortable surroundings of the BT Centre auditorium in Newgate Street at the inaugural meeting of the Clearing and Settlement Working Group (CAS-WG).

Conceived by Chris Skinner of the Financial Services Club, Chris Pickles of BT and the directors of the Realization Group, this is an attempt to start something similar to the successful MiFID joint working group but for clearing and settlement. We went along, not because we thought we had anything to contribute, but believing we could learn something about what happens after someone clicks a “buy” or “sell” button on one of our clients’ single-dealer platforms.

UPDATE: A detailed write-up of the meeting, with photographs, is now available on the Financial Services Club blog.

Dealing with the regulatory fire-hose Continue reading

Latest BIS data shows slight rise in OTC derivatives activity

Bank of international Settlements (BIS) has just released OTC derivatives market activity in the second half of 2010.

Headlines: Continue reading

What can OTC Derivatives learn from Silvers crash last week?

A key objective of Dodd Frank has been to put in place regulations for the OTC derivatives markets, that will reduce systemic risk in the financial system. The mandatory use of Central Counterparty Clearing (CCP) for cleared products is key to that strategy.

Continue reading

ISDA paper: SEFs Can they improve the Structure of OTC Derivatives Markets?

ISDA Press release here about new paper they have just published, outlining their views on The role, impact and optimal structure for SEFs in the OTC derivs market.

ISDA position is that SEFs should:

  • Provide maximum choice in trade execution to market participants;
  • Provide pre- and post-trade transparency while maintaining liquidity;
  • Have reasonable, tailored and product specific block trade exemptions that reflect the risk of a transaction instead of a “one size fits all” approach;
  • Grant access to a broad range of qualified market participants. Access rules should be objective and applied impartially;
  • Be flexible enough to allow business models to evolve over time;
  • Products required to be traded in SEFs should be limited to liquid, mature products;
  • Rules should not be simply imported from other, fundamentally different markets but should take into account the liquidity, average trade size and average trade frequency of the derivative products and the relative sophistication of the market participants.

The full paper is here: SEFs “Can they improve the Structure of OTC Derivatives Markets?”

Research: the new driver for online trading

Here’s an interesting new trend.

The business groups in banks that drive online trading initiatives in general, and SDPs in particular, are usually the trading desks – particularly, of course, in OTC markets like rates and FX.

So it’s notable that we are currently talking to the research divisions of three tier-one banks about integrating with trading. All large banks already have extensive institutional portals offering research, trade ideas and technical analysis to their customers. What’s happening now is that the research divisions that own these are looking for ROI — they want to see a direct route from their ideas to an executed trade.

There are two reasons for this: (1) it obviously makes sense to try and capture a client’s business there and then, by providing a smooth and easy route from research into execution; and (2) the research divisions want to justify their cost by associating themselves directly with revenue.

I’ve long been preaching the message that banks need to focus on vertical integration (pre-trade, execution, post-trade) in SDPs as well as horizontal integration (cross-asset). But it’s interesting to see this being driven so strongly now from the pre-trade end rather than from the trading end.

OTC Derivatives Regulation, and ‘What is a Swap Execution Facility’

In my efforts to understand the new legislation covering OTC Derivatives, I came across an excellent blog called ‘Streetwise Professor’ written as you would expect, by a streetwise US Professor of Finance and Energy Markets.

In a recent post called What is a Swap Execution Facility , the ‘prof’ looks at the new ‘Dodd-Frank’ regulations for OTC derivatives. He concludes that in their rush to promote ‘transparency’,  congress (and regulators) have created a very narrow ‘one size fits all’ definition of a Swaps Execution Facility.

This he argues is not in the interests of market participants and in his view will result in the creation of alternative execution mechanisms (similar to how equities markets evolved to create ‘dark pools’ of liquidity) that accommodate the diversity of requirements of market participants.

Here is the narrow definition of a Swaps Execution Facility:

The Dodd Frank legislation defines a SEF as a “Facility, trading system or platform in which multiple participants have the ability to execute or trade Swaps by accepting bids and offers made by other participants that are open to multiple participants in the facility or system, through any means of interstate commerce”

More on this in coming blogs.