Trading Models and Liquidity Provision in OTC Derivatives Markets

Bank of England
January 2011

As part of a G20 commitment to improve transparency and mitigate systemic risk in derivatives markets, many OTC derivatives will be required to be traded on exchanges or electronic platforms by the end of 2012. It is important that liquidity on the new trading platforms is resilient, both
during normal and stressed market conditions. This article discusses how liquidity is provided in different trading models and how liquidity resilience can be achieved. The article shows that liquidity provision depends on many factors, including the willingness of dealers to provide continuous prices, their ability to manage the inventory risk arising from their role as market makers, and the ability of customers to execute large or sensitive trades with minimum price impact. The article also suggests that conceptually, liquidity resilience can be achieved in a variety of trading models.

SEF Industry Barometer: Fall 2011

Tabb Group
December 1 2011

According to new research released publicly today, “SEF Industry Barometer: Fall 2011,” skepticism is rising across the swaps markets concerning the benefit of implementing SEFs, says Kevin McPartland, report author, a TABB principal and director of fixed income research.  Thereport’s analysis is based on responses from over 200 buy-side and sell-side market participants in the US and Europe, including dealers, SEFs, interdealer brokers, asset managers, proprietary traders, hedge funds, commercial end users, G14 and non-G14 global investment banks and agency brokers, futures commission merchants (FCMs), IT providers, exchange/clearinghouses and consultants.

 Swap Execution Facilities and Organised Trading Facilities

Celnet
November 30 2011

In a new report, Swap Execution Facilities and Organised Trading Facilities: A New Market Structure Emerges, Celent offers key insights into the likely future direction of SEF/OTF markets and critical factors setting this direction. Based on these insights, Celent believes that there are multiple scenarios for the market structure to reach the SEF/OTF future state. However, because of fragile liquidity, industry feedback, and cautious regulators, a dominant scenario emerges as the most likely outcome.

The Macrofinancial Implications of Alternative Configurations for Access to Central Counterparties in OTC Derivatives Markets

BIS
November 2011

The G-20 leaders' commitment that all standardised over-the-counter (OTC) derivatives will be centrally cleared by the end of 2012 is intended to increase the safety and resilience of the global financial system. Achieving these objectives depends importantly on the arrangements through which market participants obtain access to central clearing. Such arrangements could include increased use of existing global CCPs; the establishment of domestic CCPs in a number of jurisdictions; and the possible construction of links between CCPs. This report analyses the potential implications for financial stability and efficiency of these alternative access arrangements to CCPs.

Costs and Benefits of Mandatory Electronic Execution Requirements for Interest Rate Products

ISDA
November 1 2011

This paper examines in considerable detail the likely costs and benefits of mandating the execution of interest rate swaps on designated contract markets (“DCMs”) or on swap execution facilities, (“SEFs”). The “Electronic Execution Mandate” or the “EE Mandate” is not related to issues of safety or soundness of the derivatives marketplace. These issues are properly covered in rules regarding clearing and reporting of transaction data to regulators. Regulation affecting market structure rather than risk should be justified by rigorous cost-benefit analysis as required by law. Since there has been no such justification, the International Swaps and Derivatives Association (“ISDA”) decided to conduct a comprehensive cost benefit study and retained NERA Economic Consulting to assist in the research and analysis. The study indicates that the EE Mandate, in all likelihood, will bring little benefit to the market while adding significantly to the costs of using derivatives.

EMIR and OTC Derivatives Clearing in Europe

Celnet
October 18 2011

In a new report, EMIR and OTC Derivatives Clearing in Europe: Tough Times Ahead, Celent looks at the main features of the regulation, along with its impact on the market participants. EMIR is expected to be implemented by January 2013. It is going to be voted upon by the European Parliament in Q4 2011. Once implemented, it will be flexible in its orientation and further changes could be made with regard to issues such as the definition of eligible derivatives and the threshold levels for nonfinancial users.

An Introduction to the US Cleared Swap Infrastructure

Clifford Chance
June 15 2011

In September 2009, the leaders of the G-20 stated that "All standardized OTC derivatives contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties by end-2012 at the latest."

 

Initial Margin for OTC Derivatives: The Burden of Opportunity Costs

Tabb Group
August 15 2011

New initial margin requirements are going to have a huge impact on which OTC derivative products become more popular and which are abandoned. For example, like a sin tax, the proposed level of initial margin requirements for uncleared trades will render certain trade structures extinct. Initial margin levels for even the most vanilla trades will still be a huge drag on capital given that they are starting from zero today. Even small margin requirements attached to huge notional values outstanding have the potential to wreak havoc on product selection.

 

One-Year Anniversary Dodd-Frank Progress Report 

Davis Polk
July 22 2011

Davis Polk & Wardwell LLP today released a report analyzing the rulemaking and implementation progress of the Dodd-Frank Wall Street Reform and Consumer Protection Act following its one-year anniversary. The Progress Report contains a wide range of statistical data and graphical illustrations of the Dodd-Frank rulemaking process and takes into account the scores of rulemakings that had a July 21, 2011 deadline.

 

Higher Frequency Swaps Trading: Market Making and Arbitrage

Tabb Group
July 14 2011

Whereas before automated swaps trading was both improbable and impractical, OTC derivative reform efforts are setting the stage for some long-overdue market innovation. Automating the trade confirmation process by launching Deriv/SERV in 2004 was a great first step, but that evolutionary change pales in comparison to the changes that are upon us now.  Principal trading groups (PTGs) are known as firms that flourish in highly liquid and highly electronic markets. The manual and bilateral nature of the swaps market has kept PTGs on its sidelines for years.

 

Interest Rate Futures: Innovate and Prosper

Aite Group
June 23, 2011

The exchange landscape for interest rate futures is changing dramatically as exchanges launch new products and a new entrant emerges. A new report from Aite Group examines the state of the interest rate futures market. It explores the products available and highlights changes at and new offerings from the three major U.S. exchanges in the space.

 

The Economics of Central Clearing: Theory and Practice

ISDA
May 2011

Authored by Craig Pirrong, Professor of Finance at the Bauer College of Business at the University of Houston, “The Economics of Central Clearing: Theory and Practice” is the first in a series of discussion papers by ISDA covering key topics in OTC derivatives, public policy and financial regulation. This report is particularly timely given the current regulatory proposals to expand the role of central clearing, and the active debate about the rules that should apply to it.

 

The Changing Environment for Managing Interest Rate Exposure

TABB Group
May 19, 2011

The OTC derivatives markets represent a $600 trillion marketplace with broad participation from banks, institutional investors and corporate end-users around the world.  The marketplace is in flux however, as coordinated global regulation is creating a dramatically different market for trading interest rate swaps. Central clearing for end-users, the use of organized trading facilities and increased transparency and reporting requirements are all being mandated through these global regulatory efforts. The impact of these changes will shape the future of interest rate swaps trading and is forcing many market participants to reexamine their interest rate hedging and exposure strategies.

Impact of the Dodd-Frank Act on OTC Derivatives: Challenges Reign

Aite Group
April 28, 2011

A new report from Aite Group addresses the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act (aka FinReg) on over-the-counter (OTC) derivatives, and discusses outstanding issues associated with its implementation.

Swap Execution Facilities: An Industry Barometer

TABB Group
April 12, 2011

With the comment period behind us and the final rules only a few months away, there is still a lot of uncertainty in the market about what final OTC derivatives market rules will look like. In this report, TABB Group provides answers to critical questions, such as: who will be the winners and losers, how will liquidity be impacted and what will the market look like when the dust settles.

The Future of OTC Derivatives: Swap Execution Facilities and the New Dealer

TABB Group
October 28, 2010

This study examines the open issues to be debated between market participants and regulators, and pinpoints winners and losers based on what form the final rules take. It also examines how market participants are preparing for the new world even though so many questions remain unanswered.

 

The Interest Rate Swaps Market: An Old Product Has New Issues

Aite Group
October 12, 2010

Interest rate swaps have served as important risk management and financial engineering tools for many years. New regulations will be far-reaching, but their full impact remains up in the air.

Assessing Impact of the Dodd-Frank Act on Derivatives Markets

Celent
October 2, 2010

The Dodd-Frank Wall Street Reform and Consumer Protection Act is a vital piece of legislation that will come into full effect over the next few years. Its impact will be far-reaching, and it is expected to be as important for the financial services industry as the Glass-Steagall Act of 1933.

 

An Analysis of the Global Market for Derivatives - The Impact of New Regulation

Adsatis
September 2010

During July and August 2010, Adsatis consultants interviewed approximately 40 senior individuals from financial organisations to elicit opinion on the likely impact of the legislation that has been passed in the US and the likely direction in European regulation given recent draft legislation. We had a particular focus in our research on the impact on the OTC derivatives markets, although discussions inevitably extended into the wider areas of financial stability and risk management. The interviewees were based in the US, London and mainland Europe and represented investment banks, investment organisations, clearing houses, exchanges, brokers and market infrastructure companies.

OTCD: Clearing the Road for Progress

Aite Group
June 22, 2010

Poised for growth, the OTCD Market Must Overcome Challenges In Order to Realize its Full Potential.

A new report from Aite Group, LLC focuses on current issues in the over-the-counter derivatives (OTCD) marketplace, the makeup of the OTCD market, issues surrounding counterparty risk management, and the impact of pending legislation and regulation.

OTC Interest Rate Swaps and Beyond: The Path to Electronic Markets

TABB Group
February 10, 2010

This report provides interesting insight into the ongoing debate over OTC derivatives reform. In particular, the report details why and how electronic markets will play an important role in increasing efficiency and transparency for market participants.

 

Centralized Clearing of OTC Derivatives: Devil in the Details

Greenwich Associates
January 2010

This report portrays an important perspective regarding derivatives reform. The study indicates that many traders and executives are still unclear about how the proposed OTC derivative legislation will influence them, and that regulators should more fully consider how this legislation will affect corporate hedging practices.