Friday, November 2, 2012

More on the derivatives regulation fiasco

The FT published two helpful articles today discussing the effects of the Dodd Frank derivatives regulation.

US swaps shake-up set to boost exchanges

Dodd-Frank roils Asia energy derivatives

Here are some comments on these developments:

1. The derivatives clearing platforms continue to be a fiasco. When talking to people in the business who are end-users, you will hear comments like "clearing is such a pain in the ass, it's just not worth trading the product." This is driven by the remaining regulatory uncertainties, operational complexities, increased margin requirements, and high transaction costs.

2. Many are looking for alternatives to OTC derivatives clearing such as using futures (including block futures trades that don't hit the transaction board until the end of the day) or even ETFs (for example some are now using HYG instead of HY CDX for smaller transactions.)

3. The CFTC registration requirements for OTC swaps traders is damaging their business - particularly for energy swaps.

4. The new rules could create a disruption in the energy markets (per FT articles above).

As usual, blunt regulation (see discussion) is causing problems for the end users - including participants in the energy markets. What's sad however is that NONE of the products that are expected to be cleared have contributed to the financial crisis. The only major OTC derivatives related disaster in 2008 was AIG (Lehman, Bear, Citi, Wachovia, etc. issues were due to funding, mortgages, etc.). But the types of derivatives that had brought down AIG (structured protection on CDO tranches) will never even end up on a clearing platform. Rate swaps, corporate CDS, energy swaps, etc. have functioned perfectly well during the financial crisis.

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