Many end-users are concerned that OTC execution will become too expensive as a result of mandatory clearing, and are looking at futures as a viable and cost effective alternative. Simon Weetman, Head of Clearing and Custody Sales, EMEA at Nomura, explains why a wholesale change in end-user preference is unlikely in the short-term.
Much has already been written about the
'futurisation’ of the swaps market. Initially this
referred to the replication of an OTC derivative exposure using
a futures contract, as was the case when ICE and CME switched
their OTC energy products to futures.
However, the concept of futurisation has evolved and is
additionally used to refer to the wider shift of trading from
OTC products to futures. With the cost of OTC derivatives
increasing, dealers are preparing for a shift in activity.
Nevertheless, a broad-based futurisation of the derivatives
market is not likely in the short-term.
The G20-driven reforms to the OTC derivatives market are
designed to make the market safer and more transparent. While
these changes will increase costs for OTC derivatives users, it
is often overlooked that they will also lower the traditional
barriers to entry such as credit ratings and legal
documentation, allowing new entrants to access the
The increase in costs will come from direct fees, indirect
collateral costs related to central clearing, as well as costs
passed on to participants from increased capital requirements
and leverage ratio constraints.
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