Top 15 OTC Derivatives Dealers Set to Spend Nearly $675 Million in 2010/2011 to Prepare Technology for Dodd-Frank OTC Derivatives Trade Execution and Central Clearing Mandates
Spending May Continue into 2012 Based on Implementation Timelines Set by Regulators
NEW YORK & LONDON, November 11, 2010 – With passage of the Dodd-Frank Act “conferring jurisdiction (on the CFTC and SEC) to issue a rule, regulation or order providing for oversight or regulation of the swaps market,” major change lies ahead. For years, bulge-bracket dealers have been playing defense, trying to hold onto the lucrative market, but in recent months, their strategy has switched to offense. According to TABB Group in a new research report, dealers have had to finally accept that the market will change radically and they need to take the bull by the proverbial horns.
As a result, claims Kevin McPartland, a TABB senior analyst and author of the new research, ”The Future of OTC Derivatives: Swap Execution Facilities and the New Dealer,” TABB believes that the number of dealers handling swaps is set to experience dramatic growth, doubling if not tripling, from roughly 10 in 2010, to as many as 30 by the end of 2011. In order to compete, TABB estimates that the top 15 dealers will spend roughly $385 million surrounding the move towards central clearing.
To create a more efficient electronic workflow instead of the current environment dominated by spreadsheets and dual keying during that same period, TABB also estimates that the top 15 banks will invest $290 million. While only the largest banks have the capacity to come at this from all fronts, McPartland says, “Competition will be fierce at every layer, driven by smaller players with highly focused offerings of their own.”
For now, everyone waits. At final count, the CFTC, SEC, Federal Reserve, FDIC, Treasury Department, Financial Stability Oversight Council (FSOC) and OCC have to write 52 rules to fully enact reforms defined by Congress, specifically the 848 pages dealing with OTC derivatives, which must be in place by July 15, 2011.
Then the real work begins, says McPartland. “The swaps market is going to finally change with existing and new dealers, interdealer brokers, swap-execution facilities (SEFs), clearinghouses, the buy side and every other participant ready to put their best foot forward. But understand the situation: everyone will finally have the information necessary to retool processes, business models and technology to comply. Although the minimum implementation time regulators can set is 60 days, it’s more likely this will take six to 18 months, a reform process that will not be completed until the Olympics in London…in 2012.”
“Regardless of where the chips fall, the OTC derivatives market is in for revolutionary rather than evolutionary change,” says McPartland. “Phones won’t disappear, high-frequency swaps trading will not be born overnight, but the area in between will see these markets grow. While existing bulge-bracket dealers will not die, they’ll change as new dealers emerge with fresh approaches and innovative technology, grabbing a part of the market. No, the OTC derivatives markets aren’t going to wither and die; they’ll grow and prosper. This story has only just begun.”
The 25-page report with 6 exhibits, based on conversations with major and aspiring swaps dealers, interdealer brokers, exchanges, soon-to-be swap execution facilities, legislators and regulators, examines issues to be debated between market participants and regulators and pinpoints winners and losers based on what form the final rules take. It covers how firms are preparing for the new environment; the transition from a dealer-to-dealer (D2D) market; the new dealer puzzle and how participants plan to create a cohesive, cleared OTC derivatives (COD) business; clearing and the futures commission merchant (FCM); compliance costs; sources of liquidity; single-dealer portals; best execution (REG NMS for swaps?); and the block-trading exemption.
The new report is available now for download by TABB Research Alliance Derivatives clients and pre-qualified media at https://www.tabbgroup.com/Login.aspx. For an executive summary or to purchase the report, visit http://www.tabbgroup.com, or write to info@tabbgroup.com.
About TABB Group
TABB Group is the financial industry’s only strategic advisory and research firm focused solely on capital markets. Founded in 2003 and based on the proven interview-based research methodology of “first-person knowledge” developed by founder Larry Tabb, TABB Group analyzes and quantifies the investing value chain from the fiduciary, investment manager, broker, exchange and custodian, helping senior business leaders gain a truer understanding of financial markets issues. For more information, visit www.tabbgroup.com. In January 2010, TABB Group launched TabbFORUM, the by-invitation-only online community currently with 5,000 capital markets subscribers drawn from buy side and sell side firms, exchanges, regulatory agencies, academia, vendors and media, focusing on thought leadership issues covering current industry-wide topics.
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