As Wall Street prepares to cope with the consequences of Dodd-Frank on the swaps markets, Tracy Alloway and Michael Mackenzie reveal the true impact of the swaps regulation on the banks.
With anticipation mounting around the US regulators decision on swap execution rules later this year, many banks are preparing to face the prospect of how derivatives will be traded, effectively using less leverage and by extension resulting in smaller bonuses.
Opening up the swaps market is a concern for the banks as it will lead to greater competition and smaller trades, however as seen with the recent losses from credit derivatives trading at JPMorgan and the Libor scandal, greater transparency in the OTC derivatives market seems a timely resolution.
Bradley Wood, GreySpark, predicts that the swaps market will become more electronic with lower margins, comparing the transition to the current state of the equities market. He adds that the banks are looking for an opportunity to capitalise on this regulatory change, hinting at the clearing side of the business may be where the real money lies.
GreySpark also provide graphics for this article from GreySpark Capital Markets Intelligence, their research arm, revealing how the post-regulatory environment might look based on the Sefs’ proposed plans.