By Karen Brettell
NEW YORK, March 25 (Reuters) - U.S. senators are at animpasse on details of how to reform the $450 trillion privatelytraded derivatives market, and the final bill may determine howmuch market share, and profits, large dealers can retain in thelucrative markets.
The Senate Banking Committee last week approved a sweepingbill for financial reform, drafted by Democratic ChairmanChristopher Dodd. For details, see [ID:nN14165412].
The derivatives component of the legislation, however, wasconsidered a placeholder pending amendments from Senators JackReed and Judd Gregg. Reed, a Democrat, said on Friday that heand Gregg, a Republican, were unable to agree on details aboutexemptions in the bill.
A key question is how many trades are ultimately put intocentral clearinghouses, which may then be subject to electronictrading. This has the potential to narrow trade margins andshift market share away from dealers to newer players,including exchanges.
Revenues lost from dealers could be significant. Researchand advisory firm TABB Group estimates the top 20 dealersgenerate around $40 billion annually from privately tradedderivatives, excluding credit default swaps.
JPMorgan (JPM.N), one of the largest derivatives dealers,has said it generated a third of its overall investment bankingprofits from over-the-counter derivatives between 2006 and2008, Moody"s Investors Service said in a recent report.
The failure of senators to reach agreement, "significantlydiminishes the prospects for OTC derivatives reform becominglaw this year," analysts at Keefe, Bruyette Woods said in areport.
The impasse gives dealers time "to take control of theprocess themselves and the Europeans to move closer toregulatory reform before the U.S. revisits next year," theysaid.
Central clearing, in which a central counterparty standsbetween trading partners and guarantees the trade, is viewed askey to reducing the risks from derivatives due to the maze ofexposures of the contracts between large institutions that areconsidered critical to the financial system.
By removing counterparty risks from the contract, clearinghas the potential to open up trading and brokerage of theproducts, allowing investors to bypass large dealers thatcurrently act as intermediaries to all trades.
The Dodd bill calls for exchange trading of the contracts.
"The bill"s requirement that centrally cleared OTCderivatives be exchange-traded will likely permanently impairthe profitability of this business for dealers," Moody"s said.
However, "because the dealers also recognize the threat ofexchange-trading to their profits, the bill"s linkage ofcentral clearing to exchange trading could become an obstacleto such cooperation," they added. "To protect market-making andstructuring spreads, the dealers could choose to reduce, asmuch as possible, the centrally cleared proportion of themarket."
Companies that use derivatives to hedge against interestrate, currency, commodity and other risks are likely to winexemptions from clearing because they say that marginrequirements would be too costly.
Defining which companies are hedging, as opposed tospeculating with the contracts, however, may be difficult.
There is also debate over which companies will qualify asmajor swap participants and therefore are required to centrallyclear all eligible contracts, and whether this would extend tolarge hedge funds or other speculators, in addition todealers.
The Dodd bill defines a major swap participant as someonewhose failure would cause large counterparty losses.
Meanwhile, the Commodity Futures Trading Commission andSecurities and Exchange Commission, which will enforce therules, may push for few exemptions.
CFTC Chairman Gary Gensler has said exemptions should benarrowly applied, and that all financial companies, includinginsurance companies and hedge funds, should be required tocentrally clear eligible positions.
Gensler has further said that contracts that are notcleared should still be traded on electronic trading platformsto promote transparency and reduce trading costs. (Reporting by Karen Brettell; Editing by Kenneth Barry)
Stocks Currencies Regulatory News Bonds Funds News ETFs News
No comments:
Post a Comment