Legislators’ efforts to exclude certain swaps from Dodd-Frank Act rules requiring US banks to separate deposit taking and swaps trading activities could lower buy-side trading costs, but the impact would be a muted by wider changes to the OTC derivatives market.
A bill that removes the ‘push out’ provision in Dodd-Frank by exempting most derivatives trading by institutions with access to deposit insurance and discount borrowing was passed with bipartisan support in the US House of Representatives this week, but does not currently have support in the Senate or White House.
The existing rule would require banks to operate swaps trading activity in separate affiliates, the cost of which would likely be passed onto the buy-side in the form of higher trading costs.
“The existing rule will be phased in over a two-year transition period and might affect the eventual cost and liquidity in the products that are pushed out,” Sean Owens, director of fixed income for consultancy Woodbine Associates, told theTRADEnews.com. “But, at this stage it’s unclear whether these, or any other, legislative efforts have any real chance of success.”
A companion bill in the Democratic-controlled Senate received a small number of votes and the White House last week stated it did not support the bill and called for Dodd-Frank to be implemented before any such revisions were made.
More relevant to the buy-side, suggested Owens, will be the strategic decisions taken by banks in light of Dodd-Frank and Basel III.
“Many institutions ‘see the writing on the wall’ and are assessing the new cost structures and considering changes that could significantly alter their traditional capital markets business models,” he said.