Consensus between market regulators, participants on derivatives market structure seen

Nearly two-thirds of global market participants have implemented changes ahead of regulatory reform.

Regulators and market participants are surprisingly aligned on what the key components of a workable derivatives market structure should be in the future, with changes likely to revitalise the listed and over-the-counter (OTC) markets in a manner that benefits all, according to a research report co-authored by BNY Mellon and the TABB Group.

The report, entitled "Derivatives – Protection without Suffocation: Thriving in a New Era of Regulatory and Market Transformation," found that a consensus is emerging on a global framework that will help to reduce risk through the use of central clearing, increase transparency by moving toward electronic price discovery and execution, and improve market stability by creating new collateral management standards.

"While market participants and regulators are at odds over certain aspects of derivative market reform, our research detected a strong movement toward creating a workable framework that will accommodate stronger regulations and risk reduction without suffocating market activity and ongoing innovation," said Andrew Gordon, Executive Vice President for Broker-Dealer and Alternative Investment Services, BNY Mellon, Asia-Pacific.

Key findings presented in the report - which are a result of a survey conducted with asset managers, broker-dealers and clearinghouses - include:

63% of survey respondents have already implemented changes ahead of regulatory reform, with these changes primarily focused in the areas of clearing, front, middle and back office operations, and trading currently being implemented.
79% of respondents indicated that they believed central clearing for standard products will reduce systemic risk, while nearly an identical number – 74% – acknowledged central clearing and execution will reduce profit margins;
58% of respondents currently do not post or accept collateral when conducting OTC derivatives trades. In addition, the majority of participants have concerns regarding potential changes in the types and amounts of collateral being used when moving from OTC to cleared environments;
Nearly half (47%) of respondents are seeing a move towards electronic execution for OTC derivatives products, with the use of algorithms to trade OTC derivatives just starting to emerge;
58% of respondents believe that joint oversight of the OTC derivatives market by the Securities and Exchange Commission and Commodity Futures Trading Commission would be a mistake given their different approaches to oversight.

The report also indicates that while changes to the market will initially reduce revenue and profits for participants, in the long term, as a result of increased standardisation and volume, revenue and profits will actually increase.

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