Weekly Roundup | 27th June 2014

Banks may stand to lose as much at $4.5 billion in OTC derivatives due to the mandated move to electronic trading, according to a new McKinsey & Co. report. That
June 30, 2014 - Editor
Category: Dodd Frank

Banks may stand to lose as much at $4.5 billion in OTC derivatives due to the mandated move to electronic trading, according to a new McKinsey & Co. report. That loss translates into a 35 percent revenue drop. Charts in the report show how price transparency and competition are expected to slice bid-ask spreads.   Of relevance is the paper’s claim that dealer profits take less of a hit under RFQ protocol than with an order book, and that SEFs may be unable to “withstand the shift” among execution styles. The report outlines multi-faceted issues and challenges facing the industry.

From the onset of electronic trading of OTC swaps, the industry has expected consolidation of venues. Two new articles say the expected first wave of mergers of swaps execution facilities (SEFs) is now “on the cusp” of occurring.  A challenge facing SEFs in their struggle for survival is that the number of instruments listed on an SEF has a significant impact on SEF operational cost. One prediction is OTC derivative markets will be sliced further into voice and electronic trade types, with some instruments transacting by either, with others specific to one method.  

The buy side view on SEFs is that so far volumes have been underwhelming, but then so have swap volumes overall, begging the question how much trading is occurring? The article linked below shares a first-hand buy-side perspective.  

Tradeweb dethroned Bloomberg in rates swaps volumes for one week in June adding an element of competition for the tops spot that Bloomberg has seems to have an unshakable grip on for months. (The article linked below doesn’t share the exact week of this occurrence, but our weekly SEF analysis shows it was the week ending June 13. The week ending June 20th was not close among the two SEFs as Bloomberg reclaimed its position.)The article also shares SEF perspectives from an operator on activity to date and client engagement.

ICAP may be considering separating its global brokering business from its electronic platform, according to an article linked below. Part of the motivation may be to lower capital requirements, the article says, which highlights some of the pressures interdealer brokers are facing under a new market structure.
http://on.ft.com/1meihRy (subs)

A new white paper explores preparing for risk-based margining of non-cleared derivatives.  
http://www.secfinmonitor.com/current-members-login/?wlfrom=%2Ffinadium-preparing-for-risk-based-margining-of-non-cleared-derivatives-free-via-murex%2F (free subs)

Large international banks are avoiding registering with the Commodity Futures Trading Commission and taking other measures to dodge what they see as burdensome regulatory requirements, according to a Risk Magazine article.


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