Quantifi, a specialist provider of risk, analytics and trading solutions, and today announced the release of their whitepaper ‘The Cost of Trading & Clearing OTC Derivatives, in the Wake of Margining’. This whitepaper explores how recent regulations are affecting the OTC derivative markets in complex and interrelated ways, which in turn have changed the way firms do business.
Over-the-counter (OTC) derivatives markets continue to be impacted by regulatory changes. These changes are increasing clearing costs and consequently trading costs, to an extent that could not have been anticipated by the market. Rising capital requirements are impacting profitability and return on equity. Market participants are now being forced to clear standard OTC trades through Central Counterparties (CCPs) and will soon face margin requirements for the remaining, nonstandard, uncleared derivatives.
“New financial regulations including Dodd-Frank, Basel, MiFID and EMIR are unbundling traditional OTC derivatives markets and consequently creating threats and opportunities for different market participants. These rules are increasing the cost of capital and driving the need for firms to more accurately measure the risks and profitability of OTC Derivatives. For firms to maintain their profit margin, it is important to understand the cost of clearing.”
Dmitry Pugachevsky, ResearchDirector, Quantifi
These changes are not just impacting sell-side firms. Central clearing and margin requirements for non-standard, un-cleared derivatives are also impacting buy-side firms across several dimensions including funding, risk management valuation and operations. This is prompting firms to better assess and manage costs (funding, collateral, capital) in a consistent fashion at a trade, desk and business unit level. The question is how much of these costs can be passed on to clients.
“New financial regulations including Dodd-Frank, Basel, MiFID and EMIR are unbundling traditional OTC derivatives markets and consequently creating threats and opportunities for different market participants. These rules are increasing the cost of capital and driving the need for firms to more accurately measure the risks and profitability of OTC Derivatives. For firms to maintain their profit margin, it is important to understand the cost of clearing.” comments Dmitry Pugachevsky, Research Director, Quantifi.
