The changing business model for banks in the new world order.
Looking at the derivatives space, trading at present is
conducted in two distinct but loosely linked market domains:
the D2C (dealer-to-client) domain where all trading takes place
between the "original" investor/client and their natural
trading counterparty (the bank), and the D2D (dealer-to-dealer)
domain where banks offset some of their D2C positions with each
It is difficult to exactly quantify the ratio between the
D2C and the D2D activity in any specific contract or asset
class; however it is reasonable to estimate a range of 2:1 to
5:1. For each two to five trades between a client and the bank,
the same bank trades once with other banks, warehousing the
difference and managing the associated risk.
The long period of dominance banks have enjoyed because of
their position at the crossroads of derivatives trading, may be
abruptly coming to an end due to the rules to be introduced by
the Dodd-Frank Act of 2010 in the USA and MiFID II in Europe.
These rules will ban single dealer platforms and push execution
of clearable instruments to external venues.
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