In a recent article, GlobalCustodian.com put forward the notion that inter-dealer brokers would be hit hard regarding the demands of the US administration to standardize OTC derivatives.
Christopher Giancarlo, EVP Corporate Development, GFI spoke to Giles Turner about how the changes proposed by Treasury Secretary Timothy Geithner would not have negative consequenses for the inter-dealer broker industry.
How could GFI benefit from increased clearing in OTC markets?We were the party that began the recognition of the potential of the Clearing Corp as a clearer of OTC credit derivatives, which became ICE Trust. We are very active in the energy markets which are cleared markets. We and the other inter-dealer brokers probably provide 90% of the volume to onto NYMEX and ClearPorts OTC Energy marketplace. Inter-dealer brokers have a very important role to play in cleared marketplaces. If you read the Geithners letter, what he does is call for the movement to an exchange or an electronic trading execution system. That sounds like the electronic trading platforms that are operated by inter-dealer brokers such as GFI and ICAP.
But will you become more exchange like in operation?We would say we are already de facto exchanges for OTC credit derivatives today. Once there is central-counterparty clearing, Im not sure what exchanges bring to the table that we dont already offer.
How would the introduction of a CCP for OTC derivatives change GFIs business model, or what effects would it have?It would not change GFIs business model since over 50% of the business we do today is in markets where there is one or other CCPs.
Would the increase in electronic trading balance out the potential loss of phone broking business?Our experience in many OTC markets is that the introduction of electronic execution leads to greater transactional volume in both electronic and broker-assisted transactions.
What are the future trends for inter-dealer brokers?What the CME appears to have indicated is that it would go directly to the buy-side. But even the CME has now realized that is not a constructive approach. The dealers still provide an important service.
People are getting hung up on the brass plaque on the door that says exchange, and dont realize that the inter-dealer brokers are the medium of exchange right now. If it necessary to get a regulatory designation that says exchange we will just get one.
I think too many people are way too focused on designating winners and losers. This is going to be a much more evolutionary process than some prognosticators would like to admit. The people that are serving these markets effectively today are more than likely to continue serving these markets in the future.
The business is going to follow where the liquidity is. Today, the dealers provide the capital for the market, and the inter-dealer brokers aggregate the liquidity and match the buyers and sellers amongst the dealers. Liquidity will continue to be aggregated through a combination of human intermediation and electronic platforms.
The people working with electronic platforms today are the inter-dealer brokers.
We dont read the Geithner letter to be pushing the market on-exchange. An exchange is just a regulatory designation.
We read the Geithner letter to be pushing for three primary market features: greater transparency, central counterparty clearing and more electronic execution. GFI is very well placed to serve the market in all three categories.