Thanks to a sudden slowdown in the implementation of key financial market reforms, banks have found themselves in the lucrative position of being able to hold on to over-the counter derivatives for longer than expected.
The proposal to shift over-the-counter derivatives to electronic trading platforms during the post-crisis clean-up of the financial system was brought forward in the G20 commitments and finally agreed upon in 2009.
The derivatives, including credit default swaps and interest rate swaps, were initially destined to be processed through clearing houses in order to help safeguard the financial system against possible future default fallouts. Yet implementation of the Dodd-Frank act has been put back about six months, after the Commodity Futures Trading Commission and the Securities and Exchange Commission agreed to delay implementation from a deadline set by Congress of July 15 to the end of the year.
Larry Tabb, chief executive of Tabb Group, a consultancy, said the delay, coupled with moves by Republicans in the House of Representatives to curtail funding of the two US regulators, meant dealers had won a reprieve from a requirement to relax their grip on the $600,000bn OTC derivatives market.
In a statement made to the Financial Times by Michael Spencer, chief executive of Icap, the world’s largest interdealer broker, Mr. Spencer remarked that “Because the Dodd-Frank process has been caught in treacle, many in the financial industry aren’t pushing electronification yet”.
“I think if you go back six to eight months, when the pressure was on to get everything done by July, the dealers were moving quickly toward trying to resolve the issues to make electronic trading and clearing happen,” Mr Tabb said. “However, we see a definite slowdown of the dealers and everyone in the market to adapt to the new practices. No one knows what’s going to happen.”
The European parliament this week postponed finalisation of the European Market Infrastructure Regulation (Emir), which contains similar provisions on clearing of OTC derivatives to Dodd-Frank. “Everyone has realised this legislation is much more complex than was originally given credit for,” said David Clark, chairman of the Wholesale Markets Brokers’ Association, a London-based trade group representing interdealer brokers.
According to Steve O’Conner, Chair Member for the International Swaps and Derivatives Association (Isda) and Morgan Stanley banker, “Dealers reject any suggestion that they are reluctant to embrace the reforms.” Regardless of the major delays encompassing this topic, Isda says that more than 90 per cent of eligible credit and interest rate derivatives currently traded, have in fact already been cleared.