Regulatory Exhaustion: The Market Opportunity Ahead

After years of regulatory uncertainty, the time appears to be approaching for closure to the global post-financial-crisis effort to regulate the derivatives markets. The major obstacle to closure appears to be lack of cross-border harmonization of such regulation and there is some pushback against the US regulators for being too parochial.

Investment in new products and services for the emerging exchange-traded-swaps markets have likewise been slowed because of the regulatory uncertainty, as well as by competing interests, ideology and market structures. Nevertheless, a degree of tinkering is underway and market participants are beginning to look for first-mover advantage. TABB Group sees regulatory implementation as a potential period of unprecedented product and service innovation in the exchange-traded-derivatives markets.

International regulatory closure, even if only partial, should open the gates for product innovation and market change for derivatives markets and market participation. The swaps markets grew to its enormous size because of the value it offered to its end-users. Big banks, the main providers of customizable OTC swaps, continue to have an outsized influence in determining how fast and which counterparts will be on the other side of trades.

Furthermore, the latest set of proposed rules to improve overall market structure and enhance market quality seem to appear more nuanced than major global reforms introduced in prior years. With focus on toning down the remaining pieces of Dodd-Frank and Basel accords, the industry finally shifts from dissecting rules to focusing on market implementation and determining which rules are truly having an impact on their daily businesses.

In 2015, movement of swaps onto clearing platforms is largely a fait accompli, but movement onto exchanges and SEFs and into ETD products like futures and options on futures will require innovation, education and, above all, value that provides an advantage over OTC. While the past several years of regulatory uncertainty may have left the derivatives industry marching in place, TABB Group believes the coming post-Dodd-Frank period portends to be a watershed in innovation and migration for many firms that have been preparing for this opportunity.