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March 1, 2013

Swaps Business Will Contract, Analyst Predicts

By Editorial Staff

The swaps business, with new rules finally in place by the end of the year, will contract in 2013, but it is "not clear" by how much. That's what Tabb Group's swaps expert, Will Rhode, said in an interview with CQ&D.

Some of those needing over-the-counter derivatives contacts will find the costs of clearing these products too expensive and will turn to the futures markets, Rhode said.

He also said that, by the end of the year, regulators will have finally settled on the hundreds of rules that will allow these contracts to be cleared. Interest rate and credit default swaps will be the first to be cleared, with collateralized debt obligations next.

Will Rhode

Still, he noted, clearing swaps is going to be "prohibitively" expensive. That will mean only the biggest dealers will be able to clear swaps because "I think the clearing space is actually going to be a prohibitively difficult space." Smaller dealers, and smaller funds looking for OTC derivative products, could be shut out or have to turn away some business, he predicts.

Why could smaller funds get shut out? "There won't be the bandwidth to bring them on board as the clearing requirement goes live," Rhode said. Smaller funds that don't generate enough business, he adds, will be turned away. For more on Rhode's view of the OTC derivatives market under the new regulatory scheme, please turn to our Q&A on page 40.

 

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