Buy-side firms, frustrated with the fees charged by dealers for client clearing, say they might stop trading swaps, risking a liquidity crisis in the $600 trillion marketplace, according to a TABB Group study.
The study, titled US Buy-Side Swaps Trading 2012, is based on 31 interviews with firms involved in the U.S. swaps market. It focuses on the future of the industry as the U.S. prepares for an era of a centrally cleared, transparently traded, trade-reported swaps market.
In addition to costs and an estimated $2 trillion that needs to be raised in margin or collateral, firms are worried about many different aspects of a centrally cleared swaps market, including the use of a central limit order book. Nearly 66% say a central limit order book is coming to the swaps market at the same time 90% conduct all their transactions by phone, the study says.
Firms also need to consider whether or not to use their futures commission merchant (FCM) for execution, the TABB study says. Although 66% of the interviewees see futures and swaps clearing as separate, nearly 90% see their FCMs clearing swaps for them as clearing comes online.
With a dip in liquidity a near certainty, waiting to see who blinks first is never comfortable, says Will Rhode, director of fixed-income research at TABB and author of US Buy-Side Swaps Trading 2012: I Can See Clearing Now, the research firms first-annual study on buy-side swaps. Everyone knows clearings coming, but theres been little movement, even as the deadlines bear down. These are high-stakes games.
(OS)