Credit and Rates Swap Dealers 2011: Redefined and Reborn

The top-tier swaps dealers are not going away, but a plethora of worthy swaps dealers are gunning to join them in the upper echelons. Whereas “swaps dealer” was once a single designation, moving forward it will define a group of market participants—some acting in all capacities and others in just one. Market makers, agency brokers, clearing brokers and prime brokers will each compete by innovating their offerings, reducing their prices, and integrating their services within the bounds of law and interfirm co-opetition.

Despite the unknowns, complexities and costs, the dealer community feels that it is ready for change. Yes, lobbying will continue on both sides and politics will persist, but the dealer community sees the advantages of a mostly cleared swaps market. This is why the top tier is spending less time fighting change and more time preparing for it. Among the biggest firms, first-mover advantage is key because the the most complex clients who will generate the most revenue are also the most sticky. Smaller, newer entrants to the swap-dealer space must be ready to begin trading before the gun goes off, but they will wait and look to learn from the mistakes of those out in front.

Top-tier dealers will remain top-tier dealers, but they will be joined by some new names. Smaller firms will find niches and compete based on expertise and technology, driving those at the top to work harder and smarter. In the end, the market will come more closely in line with other OTC markets that have already undergone transformations bringing them into the 21st century.

Key themes discussed in this research study include:
- The strategic approaches being taken by both top tier swaps dealers and their new competition.
- The future of liquidity in the swaps market and the impact proposed regulations might have on trading, profit selection and dealer business models.
- The swap execution facility selection process, and how dealers will continue to service clients in an electronic world.
- The importance of clearing membership for swaps dealers and views on clearing access.

The TABB Group Interview Based Study,Credit and Rates Swap Dealers 2011: Redefined and Reborn,is based on conversations with 23 swap dealers including everyone on the OCC’s top 10 derivatives holdings list, 13 of the 14 G14 firms, 16 of 20 Federal Reserve Primary Dealers, and the top 11 FCMs.