Financial Reform Efforts Having Little Impact on Corporates' Use of Interest-Rate Derivatives

Regulations are having little to no impact on corporate use of, and dealer selection for, trading interest-rate derivatives, according to  research from Greenwich Associates.

The proposed G20 derivatives market reform measures were intended to reduce systemic risk in part by diluting big dealers’ share of the OTC derivatives markets.

While the results of the Greenwich Associates research show some hints of movement in this direction by financial end-users, especially those in the United States, they have had no impact on global corporate treasurers.

Corporate users of interest-rate derivatives globally continue to concentrate over three-quarters of their businesses with their top three dealers and over 40% of that volume with a single primary dealer.

This continues a pre-reform derivatives market trend for corporate end-users, who have concentrated 75–80% of their business with their top three dealers over the past eight years.

This is in large part because swaps clearing and trading mandates have yet to impact the corporate end-user community. This immunity to change will be short lived however.

“A higher risk weighting for banks trades done bilaterally — even when the customer is exempt from clearing rules — will force banks to raise prices for corporate end user clients, ” says Kevin McPartland, Head of Research for Market Structure and Technology at Greenwich Associates.

Conversely, among financial end-users (i.e. asset managers and hedge funds), a shift toward a more diverse dealer list for interest-rate derivatives has begun — although only in the United States, where derivatives reform is furthest along.

The average number of dealers used to trade interest-rate derivatives by financial end users is up 15% from 2007 to 2014.

Trading is also less concentrated than it was in 2007. On average, an investor’s top dealer is seeing 29% of flow, down from 38%, and the top three dealers are seeing 64% of flow, down from 72%.

“The big dealers are still critical to the market’s functioning but the changing market structure is causing those initially affected — U.S. asset managers and hedge funds — to diversify their counterparty mix,” says McPartland.

McPartland notes this trend will work its way to corporate derivatives users in the coming years, but as our research shows, that time has not yet arrived.