Wednesday, September 12, 2012 9:05:27 AM

Derivatives markets volumes unmoved by looming reforms

The impending impact of widespread reforms to the swaps market have not been reflected in the proportion of trading executed on listed markets versus OTC derivatives, according to new research.

Financial consultancy Celent has found OTC forwards, swaps and options have not suffered any meaningful decline as market participants prepare for the introduction of the Dodd-Frank Act. In fact, volumes in OTC forwards actually rose between Q1 2011 and Q1 2012.

By comparison, exchange-traded derivatives trading has dropped, which Celent said may be a result of prolonged Dodd-Frank implementation and the ill fit of some exchange-traded options as substitutes for bilaterally traded bespoke instruments.

Yet the research revealed a significant reduction in the banking industry's credit exposure to derivatives trading, down to US$1.1 trillion at the start of this year, from US$1.7 trillion in Q1 2007, indicating swap reform may have led to de-risking in the industry.

"The derivatives markets are facing a challenging period in their evolution as the economic environment continues to be volatile," said Anshuman Jaswal, senior analyst at Celent and author of the report titled ‘US derivatives markets: Staying the course’. "However, derivatives trading is still going strong and has been able to maintain the volumes seen over the last few years."

The study also reviewed the performance of the largest sell-side firms in the derivatives space. Despite a US$9 trillion decline in the value of its derivatives business, J.P. Morgan retained a dominant position in the market. Bank of America Merrill Lynch and Citi experienced similar decreases, while volumes at Morgan Stanley and Goldman Sachs grew slightly compared to last year.

Dodd-Frank Act derivatives rules require firms to trade more OTC derivatives instruments on exchange, clear through central counterparties and be subject to stricter reporting requirements.

Anish Puaar +44 (0)20 7397 3817