The Malaysian Insider :: Breaking Views
The Malaysian Insider :: Breaking Views |
| New rules to help exchanges break brokers’ grip on swaps Posted: 03 Jan 2013 08:17 AM PST  Brokers like ICAP and BGC Partners make around a third of their revenue from the US$640 trillion (RM1.94 quadrillion) industry for trading swaps. — AFP pic Brokers like ICAP and BGC Partners make around a third of their revenue from the US$640 trillion (RM1.94 quadrillion) industry for trading swaps — financial instruments used by companies to cover their exposure to changes in interest rates, foreign exchange rates and credit ratings. Exchanges like CME Group, NYSE Euronext and the IntercontinentalExchange, meanwhile, dominate the much smaller market for futures, which give similar protection, but are more standardised and so tend not to offer exact cover. However, new US swap rules enshrined in the Dodd-Frank Act, due to be finalised in the coming weeks and take effect in the middle of this year, could drive business to the exchanges and away from the brokers, and reshape the industry globally due to the size of US markets and the power of their regulators. "It is going to be tough for the brokers. The exchanges are huge with deep pockets and they are not the types of companies you'd want invading your space," said Simmy Grewal, a senior analyst at research house Aite Group. Swaps trading involves brokers matching buyers and sellers in murky over-the-counter (OTC) markets. It has historically been less tightly regulated than futures trading on exchanges. US regulators want to drive swaps trading onto electronic platforms, like those run by exchanges, to make it more transparent and easier to regulate, and to protect the global financial system from problems that arose after the collapse of US bank Lehman Brothers, one of the largest swaps traders. These changes will effectively see brokers and exchanges starting to compete directly for swaps business later in 2013, with exchanges eager to grab a chunk of a huge market. According to the Bank for International Settlements, the swaps industry was worth US$639 trillion at the end of June 2012, compared with US$25 trillion for futures trading. The world's top five brokers — GFI, Tradition and Tullett Prebon as well as ICAP and BGC — made a combined US$2.7 billion, or 35 per cent, of their revenues in their last full financial years from interest rate swaps, the most common type. The exchanges have hinted half the swaps market could be up for grabs under Dodd-Frank, which, if true, could see hundreds of millions of dollars in revenues moving to them from brokers. REGULATORY SWAP The US Commodity Futures Trading Commission (CFTC) wants two new categories of regulated markets called Swap Execution Facilities (SEFs) and Designated Contract Markets (DCMs). Brokers are likely to trade swaps through SEFs, while the exchanges are set to offer swap-like futures as DCMs. Analysts are reluctant to estimate the extent of likely broker losses at this stage but early research suggests the reforms will have a significant impact. Three-quarters of respondents to a Berenberg Bank survey in July predicted the reforms would cut OTC trading levels by up to 30 per cent while one in eight saw regulation reducing swaps trading by between 31 per cent and 50 per cent. In a note published in November, Morgan Stanley analysts flagged potential risks to the world's largest swap broker, ICAP, which in its last financial year made 681 million pounds (RM3.3 billion), or about two fifths of its revenue, from interest rate swaps. "The greater certainty in the futures model ... will favour futures over swaps, leading to cannibalisation of the swaps market," they predicted. US$8 BILLION QUESTION The exchanges received a boost in October when the CFTC said any company trading more than US$8 billion of swaps in a year must register with it as a "swap dealer", a designation which increases capital and collateral requirements. That could encourage some swaps traders to switch to futures to avoid the hassle of registering with the CFTC. Top banks, which trade billions of dollars of swaps each day, will smash the US$8 billion limit and some 65 of the top swaps traders, like Goldman Sachs, Morgan Stanley and JP Morgan Chase registered as dealers yesterday. However the CME, the world's largest futures exchange, said it saw a definite shift to futures contracts over swaps in the weeks following the CFTC announcement. Exchanges are also doing everything they can to encourage the shift. ICE, the leading energy futures market, in October transformed its energy swaps to futures, allowing clients to continue hedging their energy exposure without adding to their swaps total. Since the CFTC's October announcement, shares in ICAP have fallen 7.5 per cent, while Tullett's have shed 13 per cent. But the brokers are fighting back. ICAP, Tradition and Tullett have all launched swap broking platforms in a bid to retain business. ICAP's i-Swap and Tradition's Trad-X reported strong demand late last year as clients switched to the new regulated swap systems. Analysts say these efforts should help to stem the flow of business to exchanges, though brokers concede they face a fight. "In terms of regulation, some parts are better crafted than others, but we are where we are and we have to make sure ICAP is well positioned," ICAP boss Michael Spencer said in November. — Reuters |
| UK productivity problem worse than thought — BoE Posted: 03 Jan 2013 08:10 AM PST  A worker weighs meat at a Tesco store in Bishop's Stortford, southern England November 26, 2012. — Reuters pic Previous research had suggested one-off demand shocks were the main reason for Britain's weak economic recovery from the financial crisis, but the research - co-authored by BoE policymaker Martin Weale — suggested this conclusion was due to flawed statistical techniques. If the findings are right, they may raise the barrier to the BoE restarting bond purchases — which offer a one-off stimulus to demand but do not tackle underlying issues — and put a greater onus on government and BoE policymakers to tackle Britain's poor productivity. Weak productivity is a well-known problem for the British economy, and official data released earlier today showed that on one measure it fell to its lowest level since 2005. However, existing research referred to in the paper by Weale and two other BoE economists suggested that "temporary demand shocks" — such as headwinds from the euro zone or government austerity — were the main reasons for slow British growth. Britain's economy shrank by around 7 per cent in the 2008-09 recession, and its recovery since then has been amongst the slowest of the six economies looked at in the study, which include the United States, Canada, Germany, France and Italy. Earlier work had failed to properly account for the links between these economies, and doing so correctly led to new conclusions about Britain, the study said. "The previous conclusions are now clearly overturned. Both permanent labour productivity and temporary demand shocks now contribute roughly equal amounts to recent (2010 and 2011) weak output growth in the UK," it said. "Given this stark difference in results and policy implications, future applied work should therefore not ignore these issues and there might be some merit in a re-examination of past ... research," the study added. PRODUCTIVITY PUZZLE If weak productivity, rather than low demand and a lack of confidence, is behind much of sluggish British economic performance, this would help explain why inflation has often been above target and higher than the BoE forecast. An unexpected jump in inflation in October was one reason why the BoE decided in November to halt bond purchases once they had reached the 375 billion pound total agreed in July, and most economists do not expect it to restart this stimulus programme . However, the cause of Britain's weak productivity — and whether it is permanent, or a temporary consequence of the financial crisis — is still largely a mystery. Part of the reason may be the effect of the financial crisis on Britain's once highly profitable financial services sector, as well as a longer-term decline in highly productive North Sea oil and gas extraction. Some BoE officials also blame a lack of bank credit stopping firms from moving into more profitable niches, and this is one reason why the BoE launched its so-called Funding for Lending Scheme in August, which offers banks cheap finance. But other officials, such as former BoE policymaker Adam Posen, have played down the idea that the financial crisis permanently damaged the productive capacity of British workers, and that this would be enough of a reason to hold back stimulus. And David Miles, the only MPC member to back more asset purchases, argues that productivity itself is artificially depressed by low demand, and will pick up when growth returns. — Reuters |
| You are subscribed to email updates from The Malaysian Insider :: ALL To stop receiving these emails, you may unsubscribe now. | Email delivery powered by Google |
| Google Inc., 20 West Kinzie, Chicago IL USA 60610 | |
0 ulasan:
Catat Ulasan