As new regulations emerge to govern OTC derivatives trading and the market itself grows, a recent survey has found that financial institutions are underprepared to meet the requirements these regulations will place on them even as they plan to increase their trading activity in OTC derivatives. Released today, the survey entitled “OTC Derivatives Trading Trend Survey” was conducted by IPC Systems, Inc., a leading provider of voice and electronic trading communications solutions to the world’s top financial services firms and global enterprises. It highlights the state of firms’ and the industry’s preparedness for the OTC derivatives market’s new Swap Execution Facility (SEF) model going into 2013.
The survey generated responses from hedge funds, investment banks, broker/dealers, exchanges and other financial institutions. Key findings include:
Trading to Grow Significantly
- 94 percent said their firms are already trading swaps or other OTC derivatives or plan to do so in the next six months;
- 74 percent expect their firms’ trading volumes to increase in the next year.
Lack of Regulatory Preparedness
- 36 percent reported that their company did not have a plan in place to deal with new regulations;
- 62 percent said their firms were not well-prepared for the impending regulations;
- Only 19 percent said the industry as a whole was well prepared to meet the regulations.
Mixed View on Benefits of Regulation
- 26 percent say the benefits of new regulation far outweigh any associated costs;
- 31 percent say the impact of new regulation will be negative leading to increases in the cost/complexity of trading with little or no benefits.
Increased Transparency, Reduced Risk
- 57 percent expect new regulations to increase market and transaction transparency and 53 percent cited this benefit as moderately or critically important;
- 43 percent said that reducing systematic risk was moderately or critically important but only 29 percent expected new regulations to actually reduce such risk.
View of the Future
- 66 percent expect to see trading shift to the futures market;****
- 19 expect the importance and value of the OTC Derivatives market to grow.****
It’s All About Connections
- 62 percent say their firms are or will be connected to one or more SEFs;****
- 39 percent are connected or plan to connect to more than 10 SEFs;****
- 23 percent will connect to more than 20 SEFs.****
“The survey results confirm what we’ve been hearing from the market and it paints an interesting picture,” said Ganesh Iyer, senior product marketing manager, IPC. “OTC derivatives trading has been hotly debated for the last few years, yet there is concern - and in some cases an outright admission - that neither individual firms nor the industry as a whole are well-prepared for the coming changes.”
“This concern is juxtaposed against an already operating and fast-growing market,” Iyer said. “Taken together, these points underscore what we have concluded and what our customers have learned: connectivity to SEFs and the various other OTC derivatives execution venues is critical not only for addressing compliance concerns but also for gaining competitive advantage and capitalizing on new opportunities.”
The research covered a broad range of roles supporting the full trade lifecycle from order initiation and execution to clearing and settlement. Respondents came from the front, middle, and back office and included people involved in both the business and technology sides of trading operations.
IPC offers high- and low-touch trading communications solutions to the global financial trading community including the top investment banks, hedge funds and investment managers in established and emerging markets. With a 100-percent focus on this sector and nearly 40 years of expertise and an unrivaled record of innovation, IPC provides customers with unified solutions that support collaborative voice trading and real-time electronic trading and market data connectivity. IPC’s offerings include the first unified communications/application platform, award-winning hard and soft turrets, electronic connectivity services including enhanced voice services, business continuity solutions, and follow-the-sun service and support. IPC’s global reach extends to nearly 60 countries – including a financial extranet of 4,000 on-net locations in over 700 cities and more than 115,000 turrets deployed worldwide. Headquartered in Jersey City, New Jersey, IPC has approximately 1,000 employees located throughout the Americas and the EMEA and Asia-Pacific regions.