There is an art to arriving at a party just in time. Too early and there is much awkward waiting around, but arrive too late and the food is gone, the fridge is empty, and all the interesting people have moved to the next party. In much the same way – getting your investment in post-trade OTC infrastructure right is all about timing.
The mid-term mandate of regulators is clear - the way OTC swaps transactions are traded, settled and reported must change. Central counterparty clearing and trade reporting will reduce systemic risk and increase transparency, but delays in working out both the scope and the detail has meant that many market participants have sat on the sidelines, and delayed investing in the infrastructure that is necessary to comply with Dodd Frank, EMIR, and other global regulatory initiatives.
The firms providing clearing, connectivity and transaction management services are like the anxious party hosts – with the band ready to play, the food ordered, the drinks chilled…will anyone show up? FSIs are hedging their bets. The increased complexity and costs of OTC trading will mean volume will shift, consolidation and rationalization is likely, but all of this is a matter of getting the timing right.
One interesting phenomenon is the success of specialized hub services like Markit and Traiana in signing up the largest sellside and increasingly buyside firms. It looks like there is a collective decision to share investments at the level of connectivity and messaging. The emerging competitive battleground is how to use that investment to maximize the use of capital and optimize collateral management and margining.
Our upcoming research on post-trade OTC technology providers describes how firms can navigate the complex matrix of connectivity and trade management using best-of-breed or single-stop-shopping technology strategies. To learn more in the meantime, CEB Capital Markets members can download our recent research on impact of OTC regulation:
Webinar Replay: The Changing Landscape of Over-the-Counter Derivatives