Many capital-constrained European swap dealers are balking at the expense of establishing OTC clearing services, joining clearinghouses and setting up new technology in the midst of the widening eurozone crisis and intend to battleif not derailEuropean OTC reform, TABB Group says, citing its own benchmark survey.
Participants in the survey included top-tier and mid-tier swaps dealers, European regional dealers and new entrants.
In the survey, 70% of dealers said they were lobbying against reforms, although they were continuing to build systems upon the presumption that regulation affecting OTC derivatives, such as Basel III, will go forward as planned.
Top-tier European banks are each planning to allocate a minimum $100 million a year to their OTC derivatives reform technology budget, according to the survey, while mid-tier firms expect to spend in the tens of millions.
Top-tier dealers are building out their trading and clearing operations, revamping their prime brokerage, clearing and intermediation teams to operate as new, stand-alone units that can cross-sell swaps into the hedge fund space, TABB says. Mid-tier dealers, however, are balking at the cost of clearing, but the common denominator across all strategies is technology. Whether it be trading connectivity, reinventing prime broker systems for client clearing, implementing straight-through processing software or revamping single-dealer platforms, these dealers are dedicating valuable resources to new technology roll-outs, despite such capital constrained times, says Will Rhode, TABB senior research analyst and author of European Credit & Rates Dealers 2011: Capital, Clearing and Central Limit Order Books, the report discussing the results of the survey.
Rhode says dealers are criticizing the fundamental thinking behind reform, arguing that the European scope is too broad and lambasting Basel III as a punitive marketplace killerrather than collaborating with European regulators to ensure the final outcome is workable.
But the regulators are having none of it, Rhode says. They perceive vested interests and fear mongering, and, as a result, relations between London and Brussels have deteriorated so much that a trench warfare mentality exists. As we see it, both sides, however, are to blame: While regulators insist on a central limit order book for European fixed-income instruments, dealers argue their role as risk intermediaries is how to best preserve a liquid market. The next six to 12 months will be a critical period.
(CG)