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September 1, 2012

Boom Times?

Industry Pro Sees Opportunity In OTC Swaps

By Gregory Bresiger

Boom times are ahead for swaps contracts because more of them are going to be cleared, which will make people feel more comfortable about them. That's what swaps players are hoping, as the need for these contracts grows. And that's what Goldman Sachs is betting, having set up an agency-only clearing group some two years ago, as Dodd-Frank was passed. 

Dodd-Frank is changing the business because it is pushing most swaps business out of the bilateral, dealer-to-dealer model, and into a more transparent clearinghouse model.

These are the expectations of Michael Dawley, a 30-year clearing veteran and global head of futures and derivatives clearing at Goldman Sachs. His team is an agency-only group that is very different from Goldman's clearing and execution services. Dawley recently sat down with CQ&D to discuss how the regulators are writing hundreds of new rules to govern swaps, rules changes that could take some time.

He also discussed why the dramatic changes in the business will benefit his firm and others that meet the goals set by Dodd-Frank: Swaps that are more transparent and that have stiffer collateral requirements presumably will ensure that, when the worst happens, markets will not collapse.


CQ&D: How would you describe your responsibilities as co-head of the futures and derivatives clearing services business at Goldman Sachs?

Mr. Dawley: I oversee the futures and client cleared swap business, which includes OTC client clearing. We service a broad array of institutional clients. These include asset managers, sovereigns, corporates, pension funds, endowments and some larger hedge funds.


CQ&D: What differentiates your business from others at the firm?

Mr. Dawley: We are just one of many client-facing businesses at Goldman Sachs. We operate under an agency business model and as a service provider to our clients. For regulatory and client confidentiality reasons, we are walled off from the trading franchise. We have historically serviced futures clients and are the largest FCM by total segregated balances. We have also built a new post-Dodd-Frank cleared swaps business, which was modeled after our best-in-class futures business and leverages much of what we have built over the last 30 years.


CQ&D: What products and services do your clients want?

Mr. Dawley: Clients want access to a broad array of markets. That means the ability to execute and clear on some 70-plus markets across the world. Our clearing service provides a host of value-added features, including consolidated reporting, average pricing, single currency margining, position limit monitoring tools, "what if" margin calculators, reconciliation tools, data files and various other portal offerings. For execution, we also offer a suite of products including our own REDIPlus trading application, along with other popular vendor execution products. We also have execution professionals positioned globally, covering clients.


CQ&D: What products and services do clients clearing swaps want?

Mr. Dawley: Clients clearing swaps will want many of the same services and tools we offer in futures. Additional products offered are collateral upgrades for initial margin, additional "what if" margin calculators and margin optimization tools.


CQ&D: How do cleared swaps differ from bilateral swaps from a risk management point of view?