In this video blog Udi Sela, Vice President of the Numerix Client Solutions Group and Numerix CMO Jim Jockle explore how regulatory drivers are impacting the future of the OTC derivative marketplace, and the manner in which derivatives instruments are used. Along these lines, their discussion analyzes the results of the recent Risk Magazine, Deutsches Survey of 2014: Regulatory costs drive market dynamics.
While central clearing will undoubtedly increase the cost of doing business, traditional uses of the OTC market - relied upon for its flexibility and customization also remain in check. Udi discusses the evolving market dynamics for both buy-and sell-side practitioners under new clearing mandates, examining how various market participants are adapting the way they are doing business.
Jim Jockle (Host): Survey says European derivative market participants ready themselves for future clearing mandates. Welcome to Numerix video blog, I’m your host Jim Jockle. Joining me today is Udi Sela, FX Expert and Head of the Product Client Solutions Group for EMEA. Udi, Welcome.
Udi Sela (Guest): Thank you.
Jockle: So, we’re going to start with a nice quote from Ben Franklin, one of the founding fathers here in the US–it says “by failing to prepare, you are preparing to fail”. And today we’re talking about a new survey published by Deutsches Risk, that’s on Risk.net, that states over one-fifth of respondents to the survey, which includes banks, asset managers, hedge funds, insurance companies, non-financial corporates, are planning for new rules to change their business operations. While almost two-thirds state that clearing will increase their cost doing derivative trades by almost five percent.
Is this in-line exactly with what you’re hearing in the market and what do you expect the trend in terms of bespoke over the counter derivative products being utilized as they are today for hedging or even the impact on standardized future products.
Sela: Well, that’s a long question. I think in general, that amongst most people there’s uncertainty and people still need to understand and are contemplating what is needed, what is required from them in terms of preparation for the regulation, so that’s one thing.
And, in general, when I look at the results of the survey, I don’t think the results are that alarming and it doesn’t seem, for now at least, that there are very, very significant changes of the landscape are to be expected. If in general, about twenty-two percent I believe, of the surveyed institutions mentioned that this regulation will impact the way they are doing derivative business.
So that’s not huge–and even of those twenty-two percent, only a portion would move to listed contracts. So for instance, you mentioned that the futurization, which we discussed on a separate video blog, I think of those twenty-two percent, thirty-four (percent) said they would use more listed products than about perhaps twenty percent would use future contracts that mimic OTC products, which are of course much more flexible.
Jockle: So, what are the results? What one could particularly argue is more operational efficiency, if more of the elements are going centrally cleared, then there’s less requirements internally for CSA management, and things of that nature. Do you foresee a welcome change as it relates to adoption of new regulatory regimes?