Financial Industry Is Massively Underprepared for OTC Regulation

Despite growing OTC derivatives trading and market regulation, a new survey has found that financial institutions are largely underprepared to meet new regulatory requirements.

According to the survey, 95 percent of firms said they are already trading swaps or other OTC derivatives (or plan to do so in the next six months), and 74 percent said they expect their firms’ trading volumes to increase in the next year.

Despite huge growth in the sector, 36 percent responded that their company did not have a plan in place to deal with new regulations. Meanwhile, 62 percent admitted that their firms were not well-prepared for the impending regulations. Only 14 percent said the industry as a whole was well prepared to meet the regulations.

Most survey respondents, which included hedge funds, investment banks, broker/dealers, exchanges and other financial institutions , had strong reservations over the new regulations, with only 26 percent saying the benefits of new regulation far outweighed any associated costs. A third of respondents said the impact of new rules will be negative and will lead to increases in the cost/complexity of trading.

On a more positive note, 57 percent of respondents said they expect new regulations to increase market and transaction transparency and 53 percent cited this benefit as moderately or critically important.

Still, only 29 percent expected new regulations to reduce systematic risk even though 43 percent believed this was moderately or critically important, according to the survey, which was conducted by IPC Systems, a provider of voice and electronic trading communications solutions.

Meanwhile, the survey confirmed the importance of connectivity to multiple SEFs: 64 percent said their firms are or will be connected to one or more SEFs; 38 percent are connected or plan to connected to more than 10 SEFs and 23 percent said they will connect to more than 20 SEFs.

“The survey results confirm what we’ve been hearing from the market and it paints an interesting picture,” said Ganesh Iyer, senior product marketing manager, IPC. “OTC derivatives trading has been hotly debated for the last few years, yet there is concern – and in some cases an outright admission -- that neither individual firms nor the industry as a whole are well-prepared for the coming changes.” “This concern is juxtaposed against an already operating and fast-growing market,” Iyer said. “Taken together, these points underscore what we have concluded and what our customers have learned: connectivity to SEFs and the various other OTC derivatives execution venues is critical not only for addressing compliance concerns but also for gaining competitive advantage and capitalizing on new opportunities.

Melanie Rodier has worked as a print and broadcast journalist for over 10 years, covering business and finance, general news, and film trade news. Prior to joining Wall Street & Technology in April 2007, Melanie lived in Paris, where she worked for the International Herald ... View Full Bio