Although half of interest rates traders believe expected regulatory impacts will be the leading force of change across these markets in the year ahead, only 40% have begun actively preparing for the reforms as they wait for more finality on legislation, according to a new study by TABB Group.
Although were in the early stages of this transformation, its important to understand how market participants are preparing, what their sense of urgency is and how theyre operating in the face of uncertainty, says E. Paul Rowady, Jr. a senior analyst at TABB and the studys author. Our study found that the majority of buy-side rates traders are waiting for regulatory clarity before committing resources.
In addition, despite the fact that 90% of interest rate traders told TABB Group they utilize interest rate derivatives for hedging, only a small percentage 27%, including asset managers and broker dealers have actively analyzed new OTC derivative cost structures, citing regulatory uncertainty as the key roadblock.
In the study, Interest Rate Derivatives 2011: Collateral Damage in the Duration Market, 40% of buy-side rates traders say they are using all available rates products to hedge, including futures, listed options, OTC vanillas, OTC exotics and credit derivatives.
Despite the regulatory uncertainty, Rowady says, major change is inevitable. The bottom line is that new collateral rules are aimed at the jugular: the balance sheet, and both the balance sheet and collateral management issues, will become areas of contention between buy-side participants and regulators.
For sell-side service providers, these balance sheet concerns will become an increasingly important point of innovation on two levels, says Rowady. He explains how the sell side needs to enhance their technical infrastructure and process automation while preserving critical high-touch requirements of these markets. Second, in conjunction with exchanges, CCPs and vendors, they should be devising offerings to counterbalance pressures that asset managers will feel in their balance sheets when regulatory changes do occur.
For the buy side, he says that if they want to continue to compete in the rates markets particularly swaps and exotic instruments asset managers will need to learn how to handle more balance sheet pressure and intrusive reporting requests. True, regulatory timelines are still up in the air but that doesnt mean the buy side shouldnt begin preparing now for an era of more collateral costs and stringent reporting demands.
(CG)