Accenture: The OTC Derivatives Market
Posted: 21 May 2014
We believe that in the storm of debates on the proposed reforms in the over-the-counter (OTC) derivatives market, mandated under the Dodd- Frank Act (DFA), there is a risk that market players are losing sight of the immense opportunities for sustained differentiation as well as the lowhanging fruit in the anticipated new environment.
The main question troubling the market is whether the proposed rules for Swap Exchange Facilities (SEFs) or Organised Trading Facilities (OTFs) would adversely alter the structure of a fairly liquid and flexible market. Our experience with leading market players leads us to believe that the question will need to be asked differently: How can SEFs or OTFs further improve the market liquidity and flexibility and what are the opportunities that the sell-side and buyside participants can seize to stay ahead in the market?
As the final rules are being drafted, high-performance businesses will be distinguished by their ability to build flexibility into their technology investments to ensure stable and robust technology. Successful SEFs/OTFs will be those with the technology to provide error-free, real-time price dissemination and the ability to support Order Book or Request for Quote models. Technological excellence will then become a differentiating factor for the selection of the SEFs/OTFs that will dominate the market.
The DFA is compelling every participant to re-evaluate the way they operate in the marketplace. For example, against the backdrop of price transparency (the inevitable result of the electronification of the market), successful players will find opportunities for price aggregation across multiple execution venues to allow their clients access to a wide range of liquidity via a single platform. In this Agency model, the sell-side would act as an executing broker, aggregating SEF data flows and submitting orders to the SEFs on behalf of their clients. Indeed, there will be many such opportunities for value added, differentiated services that could provide competitive advantage.
A few are already investing to build these services.
The SEFs/OTFs will transform the OTC derivatives market, creating an environment that will level the playing field between the buy-side and the sell-side, and result in greater market efficiencies and transparency. Such an enabling environment will provide the opportunities for success. But the right technology and processes as well as the flexibility of technology investments will be the key to sustained competitiveness.