With the ongoing crisis in the US around the ever growing debt and the lack of influence of the President on policy this late in his term, the focus on reining in the banks has eased off a bit.
The banks profit margins are down across the board, and even those who previously seemed immune are now posting falls or loses.
So can we afford the regulation in the banking marketplace right now? The answer is of course we can, and the banks always do.
I still think that the real impact in costs will be on the buy-side if the margin requirements change significantly with central clearing. Posting margin should not be an issue, but the management of that margin and the ability to utilise capital in the best way to optimise the margin is not something that the treasury units in most firms we come into contact with are ready for.
With the swings in bond prices, due to the continuing debt crisis, collateral has become a very real problem to consistently value and meet requirements. Whilst the joke cartoons using football players as collateral have done the rounds, it remains a serious issue.
So moving to central clearing is going to put a strain on the system, and may in the short term reduce volumes, as the buy-side try and get to grips with managing cleared OTC products.
Citi recently estimated that up to 68% of OTC volumes traded would be centrally cleared. The market will be reliant on the likes of Citi, JPM, and the other big custodians, to be positioned to deal with clearing relationships on behalf of their clients. All the indications are that systems changes are being made, and that these players will be ready, when Dodd Frank impacts towards the end of the year.
One interesting side note on the clearing players was BNP’s announcement that they were re-entering the Prime Brokerage marketplace with major investment. Having originally sold their market leading business to JPM several years back, this is an interesting move, and shows that they have a similar view on the forthcoming clearing changes in Europe.
As the changes come into effect it will be interesting to see how the key players interact. The custodians, the clearing houses and the market participants will have to co-operate effectively to minimise the impact of these changes on OTC products.
Whilst the regulators are right to be concerned that the OTC market is controlled and risk managed, impacting the ability to trade the regulated products effectively, could impact the market risk far more than leaving alone. There needs to be market consensus on approach.
As can be seen by the investment in Digital Vega by the Deutsche Bourse, and the continuing support of Tradeweb by their bank shareholders in growing their range of OTC products, there are market initiatives under way to be ready.
The market participants need to be ready for the changes, and some co-operation between major players will be needed. We need to get the OTC markets effectively changed to not impact the buy-sides ability to not just speculate in OTC’s, as the regulators believe to be the market risk, but to be able to continue to use the bulk of products traded to hedge risks in their cash portfolios effectively, without being impacted by volatile markets.
For advice or help with the process, or indeed more views on the markets approach, contact me or my collegues at worldflow. We can provide everything for a quick overview to a full process change to meet the new requirements.
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