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Number of Swaps Dealers Seen Soaring Due to Dodd-Frank Bill

The number of swaps dealers is projected to surge over the next year due to a regulatory environment that’s likely to drive more participants into the market, according to a report by TABB Group.

The number of swaps dealers is projected to surge over the next year due to a regulatory environment that's likely to drive more participants into the market, according to a report by TABB Group.

In turn, the new landscape is poised to create a miniboom of sorts for technology providers since the largest investment banks are likely to invest heavily in crafting a more efficient electronic workflow instead of the typical spreadsheets and dual keying that are so prevalent on today's trading desks, contends the report, entitled "The Future of OTC Derivatives: Swap Execution Facilities and the New Dealer."

"One of the main goals of the regulators is to try to level the playing field to allow more participants into these markets," says Tabb Group analyst Kevin McPartland, who wrote the report. "So rather than the five or 10 dealers we have in most swaps markets now, we'll see that grow very quickly."

TABB Group sees the number of dealers handling swaps "doubling, if not tripling, from roughly 10 in 2010 to as many as 30 by the end of 2011." The research firm also predicts that the 15 largest investment banks will invest some $290 million to improve their workflows. Meanwhile, the nation's largest dealers are expected to spend nearly $385 million to beef up their technology infrastructures due to the Dodd-Frank Act's stipulation that over-the-counter derivates be cleared through central clearing counterparties, the report predicts.

"Even for markets that are less liquid, the trades are going to have to be captured into systems, reported, fed downstream, sent to clearinghouses, and that requires a tremendous investment to build out those platforms," McPartland explains. "And that's on top of them needing to service clients well and create good interfaces for them to get access to all these new tools, products, and the process that goes with it."

Over the next nine months, U.S. regulators will sort through the finance reform bill's 848 pages dealing with how the OTC derivates market will ultimately function, with 52 new rules slated to be in place by next July. Against that backdrop, the lobbying environment is heating up as swaps dealers look to get the most favorable interpretations possible, McPartland adds.

"We were talking very broad strokes when we were in Congress and now we're down to the details," McPartland notes. "This is where the real decisions are going to be made. It'll ultimately decide who wins and who loses."

And while the minimum implementation time for the new regulation is two months, the market is unlikely to be fully reformed until the summer of 2012, the report predicts.

"Regardless of where the chips fall, the OTC derivatives market is in for revolutionary, rather than evolutionary change," McPartland writes. "Phones won't disappear, high-frequency swaps trading will not be born overnight, but the area in between will see these markets grow."

The 25-page report was based on conversations with major and aspiring swaps dealers, interdealer brokers, exchanges, soon-to-be SEFs, legislators and regulators, according to TABB Group.

As the Senior Editor of Advanced Trading, Justin Grant plays a key role in steering the magazine's coverage of the latest issues affecting the buy-side trading community. Since joining Advanced Trading in 2010, Grant's news analysis has touched on everything from the latest ... View Full Bio

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