2014 Brings New Efficiency, Costs and Further Reforms to Global Derivatives Market

Increased efficiency in the clearing of swaps trades and increased clearing costs for swaps investors will be two key trends to watch in the global derivatives markets in 2014, according to a new report from Greenwich Associates.

The year 2013 will likely go down as the year of mandatory clearing in derivatives. Once ignored by financial market professionals as boring back-office stuff, collateral management, credit limits and all other things clearing stood front and center in 2013 as swaps went from a 10-day clearing cycle to a 10-second clearing cycle.

“Given the progress made in 2013, one might think market structure change will slow in 2014—not the case,” says Kevin McPartland, head of Greenwich Associates new market structure and technology advisory service and author of the report.

In the report entitled, “The Top 10 Market Structure Trends to Watch for 2014,” Greenwich Associates identifies major changes coming in the year ahead, including the coming of age of Swap Execution Facilities (SEFs), new progress in European regulatory reform, and the following:

  • Clearing Efficiency. Last year the market learned how to clear—this year the market will learn how to clear more efficiently, which should include a huge push toward margin optimization. The infrastructure will finally come up to speed with the opportunities presented by the clearinghouses, and customers will begin to realize how expensive clearing is compared to the old bilateral world, driving an adoption of margin best practices. Clearing workflow issues will smooth out significantly. The block trade workflow, credit hub usage and sponsored access approach will all move toward business-as-usual status.
  • Rising Clearing Costs. Swaps clearing is a sticky business. Once an institutional investor has legal documents and pipes in place with a clearing member or two, the likelihood of switching due to costs and operational complexities is small. Fully aware of this dynamic, most swaps clearing members have been underpricing their offerings to gain market share since inception: This is about to end. Charges for capital usage, overnight funding, and position maintenance will start to show up on clearing statements. These charges will increase swaps clearing costs in 2014.
  • Clearing Mandates: Take Two. The consequence of business-as-usual client swaps clearing is the next round of mandatory clearing determinations from the Commodities and Futures Trading Commission (CFTC). We are not so bold as to predict what will appear on that list, but our conversations with market participants and regulators indicate one or more of the following will make the cut: FX NDFs, interest rate swaptions and/or energy swaps.

Market Structure Group
Greenwich Associates new market structure and technology advisory service helps the Firm’s clients navigate market structure changes driven by regulation, technology and behavior shifts.