Cost, capital and liquidity fears for banks over OTC derivatives regulation

Uncertainty over upcoming over-the-counter derivatives regulation is prompting concern amongst banks in four key areas, according to a survey by financial market data and technology provider Thomson Reuters.
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Uncertainty over upcoming over-the-counter (OTC) derivatives regulation is prompting concern amongst banks in four key areas, according to a survey by financial market data and technology provider Thomson Reuters.

The implications of the regulations on capital requirements, workflow, trading costs and liquidity on single-bank platforms were highlighted by banks as the most worrying unknown outcomes resulting from the proposed shake-up.

Developing OTC derivatives regulation has proven difficult on both sides of the Atlantic; in Europe disputes over the scope of the regulation, the power of national regulators and links across clearing houses and venues have not yet been fully resolved, while in the US regulation has been delayed to prevent rules being rushed into place.

The research, which was undertaken in March and April this year, involved 70 face-to-face qualitative interviews with senior managers at leading global financial institutions.

According to Thomson Reuters, clearing is primary focus because of the lack of detail from regulators on changes to workflow and the implications for pricing. Within the trading workflow the bank must now consider whether the instrument needs to be cleared, what clearing information is required, how to effectively and efficiently manage the routing of trades to central counterparties and trade data repositories as well as what the requirements for reporting will be.

Workflow effectiveness and integration were seen as the key to success for new swap execution facilities (SEFs) and multilateral trading facilities (MTFs) by the majority of banks interviewed. How vendor and client systems, processes and data work together across the workflow from pre-trade, to trade and post trade will determine the popularity of different venues according to the banks.

The research also reflected a general acceptance among banks that liquidity for instruments within the scope of the new regulations will shift from single-bank portals to newly regulated SEFs, MTFs and organised trading facilities.

On this topic, the key challenges identified by respondents are how banks will then differentiate themselves to customers and how buy-side firms will connect to multiple venues available.

Thomson Reuters intends to register all of its trading platforms as regulated trading venues in all relevant jurisdictions. The firm’s suite includes voice-based dealing solution Thomson Reuters Dealing, post-trade notification solution Thomson Reuters Trade Notification, Thomson Reuters Matching, multi-bank portal Reuters Trading For Exchanges (RTFX), and Thomson Reuters Post-Trade Confirmation.

“Our research found that banks greatly vary in their levels of preparation for the implementation of regulatory changes,” commented Jas Singh, global head of treasury, Thomson Reuters. “Smaller, non-US domiciled banks have generally adopted a ”wait and see’ approach to regulation whereas the majority of larger banks are proactively lobbying, planning, prioritising and building the necessary capabilities.”

 

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