The derivatives market will be forced to change more dramatically than what's being required under the new regulations because otherwise it would cease to exist, Tabb Group analyst Adam Sussman argues in his latest research report.
In the report, entitled " The Death of a SEF: The Coroner's Report ," Sussman argues that there are multiple scenarios that could make newly formed swap execution facilities obsolete.
"SEFs are closer to an ATS than to an exchange but in some ways, they have the worst of both worlds," he writes. "SEFs have the same amount of regulatory burdens as an exchange, a narrower slice of the derivatives market, and will largely depend on the survival of the status quo." However the status quo is in jeopardy with confidence in OTC contracts being eroded by the Libor scandal and uncertainty over credit event determinations, Sussman adds.
"The trading losses of the JPMorgan CIO office have officially put the Volcker Rule back in vogue," Sussman writes. "The business model of the dealer community is imperiled. How many hits will the industry take before it waves a white flag?"
From Tabb Group:
On the other hand, DCMs have just been handed a whole new product to trade under an existing set of regulations. In addition, many of the rules have been written to favor the DCM over the SEF.
If the DCM is so great for swaps trading, why haven't any DCMs started trading swaps since the passage of Dodd-Frank? The reality is that there are neither SEFs nor DCMs that trade swaps today. Among the 29 firms that have announced their intention of being a regulated entity for trading swaps, most have said they will be a SEF, but SEF registration approvals will not occur until 2013. Start-ups have been burning cash for up to two years.