3 Challenges Shaping the Competitive Future of US Swaps
By Will Rhode, TABB Group
Originally published on TABB Forum
With the bulk of compliance deadlines now completed and new volume and revenue data starting to roll in, the future of the US swaps market is beginning to emerge. How dealers respond to these three challenges will largely determine the winners and losers.
Dealers are displaying little homogeneity in terms of their overall strategic approach to the swaps market. Clearing and execution have been pursued with varying degrees of emphasis, and the revenue stream of each business is shifting dramatically. Given all the changes that came with the Dodd-Frank Act, this is understandable – after all, no one had a road map.
That said, we now have important new data by which to benchmark and, with the bulk of the compliance deadlines now completed, the voice of the buy side is becoming clearer. For swaps dealers, it’s time to take a step back and assess one’s position. The gun went off in 2013, but the winners will be crowned in 2014.
Which dealers emerge triumphant largely will be determined by how they respond to the following hurdles:
1. Dealers need to continue competing for swaps clearing market share. Not only is clearing set to become a healthy revenue stream in its own right, but we see an implicit decision by the buy side to send swaps execution flow to their clearing brokers.
2. In the face of shrinking ticket sizes and lower volumes, dealer revenues will come under pressure with the introduction of SEFs. Each bank will need to decide on how it chooses to implement market share strategies, whether it be via relationships and the phone, via SEFs and algorithmic pricing, or some hybrid of the two.
3. The disintermediation effect of Dodd-Frank notwithstanding, dealer relationships with the buy side will continue to be key. The trick will be in knowing where the relationship really lies, across the array of potential business lines and myriad of individuals, and understanding why a buy-side firm wants to engage.