Frederic Mantha of strategy and technology consultants Lab49 argues that as it gets harder for banks to differentiate their OTC offerings, they will have to compete on cost and scale.
The shake-up triggered by the financial crisis and the
prospect of tighter regulation are intensifying competition in
the derivatives industry.
Competitors that scaled back their activity and lost share
during the financial crisis are now making a strong push to
regain share. For example, after reducing the size of its
commodity group in 2008, Bank of America announced last year
that it had plans to expand the group by 25% in 2009 and
Central clearing for OTC derivatives will level the playing
field further. Until now, many institutions were competing by
offering aggressive credit terms. Some smaller banks were also
at a disadvantage, since they were seen as riskier
With central clearing, these competitive advantages will
disappear and smaller banks will be able to compete
head-to-head with their larger counterparts.
Improved price transparency will also contribute to
commoditisation of OTC derivatives and thus to lower
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