The New Global Risk Transfer Market: Transformation and the Status Quo

As if reading the opening passages of a classic novel and then skipping to the end to find out what happens, many stakeholders in the Global Risk Transfer Market (GRTM) have – until very recently – been operating under the expectation that the markets for swaps, futures, options and other derivatives will return to a semblance, if not better version, of today’s status quo after the current regulation-induced transformation of those markets is complete. But, since skipping to the end of the book does not make the story in the middle go away, TABB group has been curious to shed some light there, particularly given that a lot of unprecedented drama is likely to happen between the bookends; drama that will set the stage for the new winners and losers of the transformed GRTM paradigm and beyond.

Though the numbers around market sizing and volumes and the demographics of end users in the swaps markets continue to remain somewhat squishy – even as improved reporting processes capture more details from more participants in global OTC derivative markets – swap data repositories (SDRs) have performed an immeasurable service in helping to quantify more key metrics – particularly in those asset classes where public data is available, like rates and credit derivatives – on a more timely basis – often weekly or biweekly – than ever before. And, though TABB Group is emblematic of an unsatisfied appetite for more data on these markets and participants, greater clarity has served to incrementally enhance our ability to keep score in the ongoing battles between the forces of change and the forces of inertia.

In the aftermath of the credit crisis that caused the creation or enhancement of regulations like the Dodd-Frank Act, MiFID II, EMIR, and Basel III, it appeared that that the Transformation had the Status Quo surrounded, poised to exact a quick and decisive victory that would threaten to upend the economics of business models of systemically important intermediaries across the capital markets landscape. However, it turns out, as we know, that saber-rattling is not the same as application; the bilateral, dealer-centric status quo proved impressively resilient, and the regulators proved ill-equipped to proceed with the alacrity that the original timelines suggested.

And while those on the side of transformation – especially clearinghouses (CCPs), new and incumbent electronic trading venues (such as swap execution facilities, or SEFs, and new offerings from interdealer brokers, IDBs), and a spectrum of technology and analytics service providers – have been mandated small victories, or been “allowed” to win a few inconsequential battles here and there, our assessment today is that the status quo – mainly confined to a list of the world’s largest dealing banks - is still largely in control. They control the liquidity, and that is all that matters in the end. And so, with the exception of improved post-trade transparency and the clearing of the most liquid and vanilla dealer-to-dealer (D2D) swaps, it is not too much of an overstatement to suggest that not a lot has changed on the surface – which is extremely odd given how busy everyone is designing and building stuff in the background. As ultimate proof of this: Without the benefit of trade compression techniques introduced in 2003, TABB Group estimates that $238 trillion of notional values would have remained in the OTCD markets and yielded an all-time high total notional values outstanding figure of nearly $710 trillion by the end of 2011. Moreover, TABB Group’s OTCD margin shortfall model has increased its point estimate from $2 trillion at the end of 2010 to $2.6 trillion at the end of 2011, signaling, at minimum, that risk is not being wrung out of the system, as has been intended with all of the rulemaking.

Depending on how the central clearing mandate(s) are finally activated in just a few short months down the road, TABB Group believes that a cascade of long-anticipated impacts will eventually come home to roost. Whether it is imposed quickly, phased or with delay tactics, each scenario comes with significant risks and with varying impacts on varying subsets of market ecosystem stakeholders. The overarching narrative of this report is aimed at showcasing these risks and impacts.

The TABB Group Study on the New Global Risk Transfer Market: Transformation and the Status Quo

This 65-page, 84-exhibit report builds upon the initial Global Risk Transfer Market report published in November 2010. The current report explores the ongoing battle between the Status Quo and the Transformation of the global derivatives market and where various components of the market ecosystem are in their development and implementation cycles between these two poles. In particular, the report focuses on many of the primary issues and impacts in swaps today, including clearing, margin, collateral, automated trading solutions, trading costs, trade reporting and repositories, and extraterritoriality – all with an eye towards juxtaposing them with exchange-traded derivatives markets and across multiple regions.