US and European divergence in OTC derivatives trading

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18 September 2012
David Easthope
In travels to Europe last week, it became (even more) crystal clear that there is a major divergence between the US and Europe when it comes to OTC derivatives trading and clearing reforms. First, the USA and Europe are not synchronized when it comes to clearing OTC derivatives. The SEC and CFTC have been far more assertive in working to meet the G20 clearing goals (central clearing as opposed to bilateral for standardized 'swaps') under the banner of Dodd-Frank while European legislation is split between EMIR and MiFID II/MiFIR, and is somewhat mired in the political swamp at the moment. EMIR seems to be at least 6 months behind the US in terms of specifics. Second, for OTC derivatives trading in the US we can, with precision, predict which electronic platforms will likely emerge to become Swap Execution Facilities or SEFs in 2013, which is where standardized 'swaps' are mandated to be traded. The race to become SEFs is a few years old, but will finally happen next year, barring political disturbances which can never be discounted. However, in Europe while it is clear which electronic platforms have an abiding or fresh interest in trading standardized, centrally cleared OTC derivatives contracts on their platforms, implementation of MiFID II/MiFIR (the trading mandate) may not be happen until 2015. At the same time, unlike SEFs, it is not entirely clear which venue type is going to be the organised market of choice for the sponsors of these platforms. In other words, Europe is not only diverging from the US in terms of the timing of legislation around clearing, it is actually beginning to decouple from the US in terms of trading rules and methods. This fact has major implications for global banks with technology and staff supporting multiple trading platforms across the globe. In future reports, we will address many of these implications and concerns. In the meantime, our eyes will be on the US in 2013 for implementation of both centralized clearing of OTC 'swaps' and SEF trading. We believe many Europeans are waiting to see what happens with the US and will adjust strategy next year. Adjust your calendars accordingly.

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