News | Markets Derivatives trading remains strong
Fears that the imminent tightening of the regulatory regime governing derivatives markets would dampen trading are proving to be unfounded despite the enduring concerns among market participants about the likely impact of reform. According to research by consultants Celent, volumes in the listed and OTC US derivatives markets have grown by over 50% in the last four years. “The derivatives markets are facing a challenging period in their evolution”, says Dr Anshuman Jaswal, senior analyst. “However derivatives trading is still going strong and has been able to maintain the volumes seen over the last few years.” The 25 largest US banks traded derivatives worth a notional value of $300 trillion in the first quarter of 2012 compared to less than $200 trillion in the first quarter of 2008. Meanwhile SwapClear, the
interest rate swaps business owned by
LCH.Clearnet, has recently reported it is now clearing OTC derivatives deals worth in excess of $3 trillion in notional value and that business in the two months to September has been especially buoyant. Despite high levels of activity,
however, fears that regulators’ determination to shift OTC derivatives from a bilateral to
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imperfect correlation in price movement between a hedge and the underlying asset), leaving firms with inadequate cover for their exposures. Extra-territorial regulation
Richard Saunders, IMA
centrally cleared business could have unintended but damaging consequences continue to unnerve market participants. The impact on costs and
risks remains a major concern. At a recent industry conference hosted by Worldwide Business Research, for example, fund managers expressed fears that rules requiring buyside firms to post liquid collateral against all OTC transactions could make the highly tailored hedging instruments, used especially by pension funds to manage their long-term investments and liabilities, too costly. If that is the case, more institutions could be tempted to buy cheaper standardised solutions in the listed derivatives market which would increase basis risk (the risk created when there is an
and protectionism are also issues for fund managers, says the Investment Management Association. Its annual survey of asset managers shows that support for more joined-up thinking on global regulation is tempered with fears that new regulation adds unnecessarily to operational complexity and hinders fair access to global markets.
“The G20 framework was
created to ensure globally coordinated responses to the crisis, but its high level nature has allowed differences to develop between different jurisdictions,” says Richard Saunders, IMA chief executive. “Global asset managers are faced with complex and often contradictory rules depending on the country they are operating in. We are seeing a rise in more aggressive extra-territorial regulations which is adding cost and complexity to the industry and breeding protectionism in different jurisdictions. The litmus test for new regulation should be whether it brings real benefits to end investors. Too often this seems not to be applied.” ■
Best Execution | Autumn 2012
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