The ongoing impasse between regulators on both sides of the Atlantic has not only created a lot of uncertainty around clearing issues in the over-the-counter (OTC) derivatives market, but it has taken its toll on market volume too.
Traders spoke with Phil Matricardi, a manager at Sapient Global Markets, and asked him about this volume dip and what to expect in the market if a regulatory agreement is reached soon.
Traders: This dispute, which has dragged on longer than expected, is really causing a lot of uncertainty in the market, especially among buyside players. How is this being worked out?
Matricardi: The industry is still just trying to make sure that they understand what activities will force them to comply with which [regulatory] regime, so that they can hopefully only have to comply with one.
There have been some no-action letters on the subject of whether the physical location of bank staff determine the regulatory regime recently, and I believe that the issue is still largely up in the air.
Traders: Volume in the OTC derivatives market has dropped in the first half of 2014. Is this a result of the ongoing regulatory problems?
Matricardi: Partially, yes. There is regulatory overhang that is hurting volume, but consistently low interest rates also hurt. There’s not a lot of volatility to play with around zero.
Traders: How are the buyside firms are handling this uncertainty and lower volume?
Matricardi: For a large firm, like a big fund or institutional buyer, things are OK because its clearing services are being taken care of by their broker or custodian, and those entities will bend over backward to serve a large buyside player. But at middle-tier shops or funds it may be more of a problem because their clearing broker or custodian may look at the amount of business coming from them and decide it’s not worth the time and expense to help the firm comply with the new clearing rules.
Another thing buysiders are doing is simply avoiding derivative products that have to go through a mandated clearing regimen and instead buying products that don’t have to be cleared. But these bespoke derivative products that don’t have to be cleared may or may not be more risky, but often they are more expensive.
Traders: Fortunately, there are indications that regulators may be moving toward a resolution to this clearing stalemate. If things are resolved, how do you think the OTC derivatives market will react?
Matricardi: I think we could see the quality of derivatives go up. We also have the potential to have enormous trading and liquidity in this market, possibly to levels seen before the crisis. Except this time, it would be regulated, and that should help the buyside.