The election of Donald Trump has injected a new element of uncertainty into a US swaps market that was finally finding its footing under its new regulatory framework.
A report from Greenwich Associates finds improved market quality in US interest-rate derivatives trading six years after the Dodd-Frank Act took effect.
Conversations with market participants reveal that spreads are generally getting tighter, down 5 per cent year over year, and RFQ response times are getting faster, driven in part by the growth of non-bank liquidity provision.
“This is the kind of competition that regulators have been hoping the market structure would encourage,” says Kevin McPartland (pictured), head of market structure and technology research at Greenwich Associates.
It is now somewhat unclear how this emerging market equilibrium will change under the new administration. The Republican president-elect and Congress are talking seriously about scaling back Dodd-Frank, which would impact swaps market participants in a variety of ways.
In the new report, Swaps Investors Explore Liquidity Options, Greenwich Associates expresses confidence that the core tenets of Dodd-Frank Title VII will remain intact, including SEF trading, central clearing and trade reporting.
“However, we do expect regulators to take a hard look at the rules written over the past five years and adopt a less prescriptive, more principles-based approach,” says McPartland.
Even so, this change will take time, with many of the alterations potentially providing a positive boost to the swaps market.
In the meantime, the 97 interest rate derivative investors participating in the Greenwich Associates 2016 North American Fixed-Income Investors Study say they plan to reallocate USD325 billion in trading business away from existing counterparties in the coming year.
That amount would put some USD130 million in revenue for swaps dealers up for grabs, ensuring a compelling story for the market in the months to come – regardless of any regulatory developments.
