Charting New Territory: Buy-Side Readiness for Swaps Reform (State Street)

July 2012

KEYWORDS: G20, OTF, organized trading facility, swap execution facility, SEF, central counterparties, CCP, MF Global, futures commission merchant, FCM, OTC derivatives, transparency, margin, Basel III, Dodd-Frank Act, United Kingdom, Enron, Volcker Rule, MiFID, MiFIR, EMIR, hedge funds, asset managers, assets under management, AUM, clearing, execution cost, prime broker, variation margin, Hedge Fund Regulation, buy-side firm, portfolio margining, broker-dealer, ISDA, Liquidity, straight-through-processing, collateral, Volatility, market efficiency, CFTC, Commodity Futures Trading Commission, major swap participant, swaps data repository, swap dealer, ESMA, European Parliament

Authors:

State Street

Organizations:
  • State Street

Summary:

The global regulatory environment, including the Dodd-Frank Act, has reshaped the financial industry and the environment in which over-the-counter (OTC) derivatives are originated and traded. TABB Group conducted a State Street-sponsored survey of buy-side firms to assess how buy-side investors are adapting to the new regulatory standards and how ready they are to meet the challenges of the future. Thirty buy-side swap market participants surveyed collectively represented more than $10 trillion in assets under management, with 82 percent of the respondents based in the US and the remainder split between the UK, Canada, Ireland and Italy. State Street’s newest Vision paper, “Charting New Territory: Buy-Side Readiness for Swaps Reform,” explores the readiness of institutional investors for derivatives reform.

Sixty-two percent of buy-side firms are seeking a roadmap to navigate the emerging regulation. Across the five aspects of readiness for OTC reform that we asked survey participants about — registration, capital/business structure, trading technology, selection of clearing brokers and electronic platforms, and reporting — not one buy-side firm stated that they were fully ready in any one of these categories. In addition to readiness, this paper explores the unintended consequences of reform, the factors influencing clearing broker, central clearing counterparty and electronic platform choice, and the impact of reform on the entire derivatives lifecycle.

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