It is clear that regulatory changes are transforming the OTC derivatives space, from execution to settlement. There are many challenges at play here. As we head into 2012, market participants will need to manage large volumes of data in order to clear and process trades, and we will see new pressures on the cost and the more effective use of capital. In response to this industry transformation, my team and I have identified 10 key trends shaping OTC derivatives today.
I have posted the full list below. How is your firm approaching these 10 trends in OTC derivatives?
- Regulations such as Basel III, Dodd-Frank, EMIR and MiFID II are spurring financial services firms to improve their return on capital rather than simply focus on top line revenues.
- Shrinking profit margins may drive existing players to exit certain asset classes, such as structured equity, rates or credit markets.
- Competition will increase as greater transparency into OTC derivatives pricing and lower barriers to entry attract new players to the market.
- Firms will leverage new electronic trading capabilities for OTC derivatives to help reduce running costs and improve returns, particularly in their flow trading and market-making businesses.
- The cost of participating in OTC derivatives trading will rise, with the introduction of central counterparties altering the risk profile and margin requirements of OTC derivatives portfolios.
- Clearinghouses and market participants will require a consolidated view of collateral assets and margin movements to manage new pressures on margin and liquidity as well as new regulatory requirements for collateral.
- The need to optimize collateral and leverage every margin offset opportunity will become more pressing as the new capital charges take hold.
- Real-time risk analytics will become a necessity, with market best practice moving towards the incorporation of Credit Value Adjustment on a pre-deal basis.
- Firms will need to aggregate data from across asset classes and business silos as regulatory agencies shift the burden of reporting position limits and large trades from exchanges or clearing houses to firms.
- Firms will demand agility and adaptability from their technology given the uncertainty about the exact details and timelines for the new rules.