The Dodd-Frank bill is likely to boost the amount of liquidity floating throughout the swaps market, but most dealers believe profits will be hard to come by in the new landscape, research by Tabb Group contends.
According to the Tabb study, "Credit and Rates Swaps Dealers 2011: Refined and Reborn," 75 percent of existing swaps dealers believe the reformed market will see a surge in participation as electronic trading access expands, while new standards for traded products are established.
But nearly 90 percent of the top level dealers and two-thirds of mid-tier dealers polled told Tabb Group they expect profits to either decline or remain flat, citing doubts about why non-dealers would want to get into a business where margins are falling even as regulatory oversight climbs.
Dodd-Frank isn't the only major regulatory hurdle either, Tabb Group argues. Nearly 60 percent of the swap dealers they interviewed say Europe's Basel III will have an even bigger impact on their business than Dodd-Frank, since that law impacts a bank's capacity to fund their swaps trading desk by placing limits on how much leverage they can take on.
"At the bank level, Basel III's impact would be far greater," said Kevin McPartland, Tabb Group's director of fixed income research. "If billions in assets were suddenly untouchable, their business make-up and bottom-line profitability would be affected." As the Senior Editor of Advanced Trading, Justin Grant plays a key role in steering the magazine's coverage of the latest issues affecting the buy-side trading community. Since joining Advanced Trading in 2010, Grant's news analysis has touched on everything from the latest ... View Full Bio