New regulations could make interest rate swaps more expensive. As a result, large buy-side firms are looking at alternatives such as swap futures, which are also getting the backing of some dealers. Is this the beginning of the end for over-the-counter swaps?
Don Wilson, founder and chief executive of DRW Trading in Chicago, recalled a conversation he had with an irate congressional staffer when Dodd-Frank financial reform was still in its infancy. The way new rules were shaping up, “I started to ask why on earth someone would trade a swap if they could trade a future instead,” Wilson said in the October issue of Risk magazine.
Questions raised by Wilson, who two years ago helped start Eris Exchange, a swap futures market, are starting to look more prescient by the day. Ten big buy-side derivatives users who spoke to Risk asked similar questions as Wilson.
Many of them are currently performing cost-benefit comparisons for a variety of different products, from over-the-counter swaps to traditional interest rate futures and newly minted swap futures – and it does not look pretty for OTC markets. Most managers say they will switch to alternative products if they prove to be cheaper than cleared OTC swaps. Many expect that to be the outcome.