Table of Contents
Introduction: Government Regulation in OTC Derivatives --
Regulatory Proposals ..............................................................5
Regulation of OTC Securities to Limit Systemic Risk -- Encouraging Centralized
Clearing and Alternative Swap Trading Facilities to Trade Standardized Products ....5
Issue #1 Regulators Mandate Clearing of Standardized OTC Trades..........................8
Issue #2 Trading of OTC Trades on Exchange and Regulated Alternative Swap
Execution Facilities......................................................................................................9
Issue #3 Margin/Capital Requirements Increase in OTC Trading .............................10
Issue #4 Transparency and Reporting Requirements.................................................11
Issue #5 Commodities Regulation and Broader Use of Position Limits ....................11
Other Regulation Proposed, But Not a Focus of This Piece ......................................12
Sizing the Market and the Participants.................................13
Sizing the OTC Markets – Interest Rates Dominate Notional Outstanding...............13
OTC Derivative Market – Most Will Be Clearable ...................................................15
Dealers and Exchanges both Important Parties to Commodities / Energy Trading;
Stakes are High given the Ongoing Regulatory Discussions .....................................17
Potential Regulation in Energy and Commodities: CFTC Expands Agriculture
Position Limits Structure to Energy Derivatives........................................................17
Implications of OTC Regulations on Volume: Initial
Pressure Followed by Multi-Year Strong, Secular Above
Trend Growth..........................................................................19
#1 Impact of Clearing OTC Trades: Adds Revenue Opportunities to Dealers and
Exchanges, Modest Positive Impact on Trading Volume ..........................................19
#2 Impact of Trading OTC Derivatives on Exchange and/or at an Alternative Swap
Execution Facility: Reduction of Trade Friction and Higher Volumes .....................27
#3 Impact of Greater Capital/Margin Requirements for OTC Trading: Somewhat
Lower Volume, as Dealers and Clients Adapt. Impact to Mitigate Re-leveraging of
Market........................................................................................................................34
#4 Impact of Transparency and Reporting Requirements – Potential for More Narrow
Dealer Spreads, Lower Transaction Costs, and Higher Volumes ..............................36
#5 Impact of CFTC Position Limits and Elimination of the Dealer Hedge Exemption
Present Risks to Both Exchanges and Dealers...........................................................40
Regulatory Inconsistencies Create Arbitrage Opportunities ......................................44
Negative Consequences of Elimination of the Dealer Hedge Exemption Could
Prevent Regulators from Altering Dealer Exemption ................................................45
Risks to Regulators Update of OTC Derivative Regulation 46
Systemic Risk Is Concentrated in a Central Counterparty Model..............................46