Woodbine Associates has just completed a study for the Institute for Financial Markets that evaluates the impact of Dodd-Frank and Basel III on OTC derivative transactions and proposes cost minimising strategies for end users.
In the wake of new regulation of the over-the-counter derivative markets in both the US and Europe, traders face new capital requirements and transaction costs relative to the size and the particulars of their transactions.
Woodbine Associates has produced a focused study on the potential impact of margin, capital, execution and market structure under the new regulatory framework on End User derivative transactions to help educate financial professionals. The research compares the direct and indirect costs of centrally-cleared transactions with those of transactions directly between counterparties and proposes cost-minimising End User hedging strategies.
Notwithstanding this practical focus, this research also is intended to help financial media, policy makers, regulators, academics and others understand cost implications of the new regulations.
The report is underwritten by a grant from the Institute for Financial Markets, which earlier this year selected Woodbine Associates as part of its annual initiative to examine high priority issues whose understanding are of critical importance to the trading and clearing of listed and OTC derivatives worldwide. The report will be published in a special edition of the Review of Futures Markets in early 2012.
“Under the new regulatory framework created by Dodd-Frank and Basel III, bilateral hedging will become much more expensive, forcing firms to separate risk transfer from customisation to minimise their costs,” said Sean Owens (pictured), author of the research. “Firms should realise substantial savings through replicating or delta-hedging customised transactions with a combination of centrally-cleared ‘vanilla’ transactions to hedge market risk and bilateral basis transactions to address firm-specific needs.”
Woodbine Associates is an independent capital markets research and consulting firm focused on strategic, regulatory, market structure, business and technology issues facing firms active in the financial markets. Sean Owens, Director of Fixed Income Research and Consulting, has more than a decade of OTC derivatives trading experience and is the chief author of the report.
The 2011 research and education project will be managed and promoted by the IFM and findings will be released in early 2012. Research findings may also be used in IFM educational courses. Funding for the award is part of an endowment to fund futures and options research made possible by a contribution from The Clearing Corporation Charitable Foundation.
