Now that Europe has begun to implement a much-delayed program of reforms reshaping the landscape for swap market participants, TABB Group in new research, “European Swap Trading: Slow and Steady Wins the Race?”, says MiFID regulations have helped increase flows to central clearinghouses, driving swap compression and altered broker relationships.
According to its author, research analyst Radi Khasawneh, there were $4 trillion of cleared swaps in the US in January alone, denominated in dollar or euro, which had to be reported to one of the 25 globally recognized trade repositories in 11 regions, illustrating the increasingly fragmented regulatory landscape.
“Europe is still a significant outlier in the application of central clearing, margin and the development of exchange-based or exchange-like trading venues based on the new designations,“ says Khasawneh. Margin and client requirement revamps and a change in swap-trading infrastructure will be the starting signals for the buy and sell side to embrace the realities and cost of mandatory clearing.
However, competitively the cost of revamping data fields and tracking information required on a granular and per-trade basis is one area in which larger, multinational asset managers and hedge funds have already pulled ahead of Europe’s regional institutions, now playing a game of catch up.
“Europe’s delays,” he points out, “may be outweighed fortunately by a relatively attractive marketplace that allows for far more choice in trading venue selection than in the US.”
The report covers differences between US and European regulatory regimes; the emerging global framework and infrastructure aimed at processing and standardizing data from reported trades and third parties offering services to manage competing obligations; trends in clearing flows by region and the future shape of the market in the context of increased implementation; and the effect of regulation on trading behaviour globally and its effect on large swap market participants.
“It’s too early to declare a winner between the prescriptive ‘bottom-up’ approach of leaving thresholds and contracts to ESMA standards, which caused criticism within the European Commission, and the ‘top-down’ approach adopted by the CFTC, with the onus on market participants, including SEFs, to define their own parameters,” says Khasawneh. “Only time (and volume statistics) will tell which approach will win, but it seems that the European approach may well avoid the potholes that have caused the greatest concern in the US – an excessive focus on electronic order book trading at the expense of existing market practice with proscriptive and silo’ed venue designations.”