ISDA recently published the results of a survey that it conducted to identify key issues and trends for the buy-side, derivatives end-user community. The results are fascinating and, we blelieve, accurately reflect the experiences of many market participants and professionals that are involved in the over-the-counter (OTC) derivatives markets. The following is a brief summary of the survey topics and results, re-ordered with cross-references to the relevant question(s) for your reference.
THE BUY-SIDE NEEDS OTC DERIVATIVES IN ORDER TO MANAGE RISK; REFORMS NOT HAVING POSITIVE IMPACT ON LIQUIDITY
Over 85% of the respondents indicated that OTC derivatives were either very important (58%) or important (28%) when it came to the implementation of their risk management strategies. See question 11.
Nearly 2/3 of respondents use derivatives to maintain and improve pricing, operating expenses and returns. The other important uses are for: hedging international risks to remain competitive; deploying capital in as efficient of a manner as possible; and hedging risks in order to allow the firm to invest for growth. See question 12.
In light of the foregoing, it makes sense that over 60% of the participants expressed a concern about increased cost of hedging. Other serious concerns are: the scope of cross-border derivatives reforms; uncertainty about derivatives reforms; and the ability to handle clearing and/or margining of derivatives trades. See question 13.
Only 3% of respondents believe that market liquidity has improved over the past year. By comparison, almost 28% believe that liquidity has deteriorated. 40% feel that liquidity is unchanged, while almost 30% had no opinion or were not sure. See question 18.
Notwithstanding those concerns, over 80% of the respondents intend to use OTC derivatives to the same extent (67%) or increase derivatives usage (15%) in Q4 2014. See slide 14.
SEFs and MTFs MAKE MARKETS MORE TRANSPARENT, ALTHOUGH MOST PARTICIPANTS DO NOT INTEND TO USE THEM
By and large, participating firms felt that swap execution facilities (SEFs) and multilateral trading facilities (MTFs) were having a positive impact on transparency in the OTC derivatives markets. However, respondents expressed a significantly lesser degree of confidence in the impact that SEFs and MTFs were having on pricing and liquidity. See question 4.
The vast majority of buy-side firms do not use over SEFs or MTFs. Over 40% of the participants indicated that they have no intention of putting a SEF user agreement in place. See questions 5 and 6.
CENTRAL CLEARING IS NOT UTILIZED AND APPEARS TO BE OF MARGINAL UTILITY TO THE BUY-SIDE
Over 55% of the survey respondents indicated that from 0 to 10% of their trades are centrally cleared. Another 20% either had no opinion or were unsure about whether their trades were centrally cleared. Approximately 11% of participants centrally cleared 75% or more of their trades. See question 15.
Almost 42% of the respondents do not have a clearing relationship with a futures commission merchant (an FCM), but 29% of respondents had relationships with two or more FCMs (22% had 2 FCMs, while 7% had more than 2 FCM relationships). This suggests that over 40% of the buy-side survey participants are not clearing trades, but that, of those that do, having multiple FCMs appears to be a common practice. See question 16.
Further, less than 20% of respondents indicated that they intend to increase the number of their FCM relationships over the next 12 months. See question 17.
THE OTC DERIVATIVES MARKETS ARE BECOMING MORE FRAGMENTED – FRAGMENTATION IS MAKING OTC DERIVATIVES MORE EXPENSIVE
Most respondents feel that regulatory changes are fragmenting the OTC derivatives markets along geographic / jurisdictional lines. 45% of the respondents indicated that such fragmentation negatively impacted their ability to manage risk, which only 11% felt that fragmentation was having a positive impact. 32% indicated that fragmentation was a non-event for them, when it came to risk management. See questions 7 and 8.
Of the firms that believed that fragmentation was occuring, nearly 60% felt that the impact of fragmentation was making OTC derivatives more expensive, while slightly less than 30% said that fragmentation was not having an impact on the costs of OTC derivatives. See question 9.
THE SURVEY PARTICPANTS
125 firms from all of the major buy-side sectors participated in the survey.
Approximate equal representation among the following sectors: non-financial corporates (35 firms); investment managers and their fund clients (38 firms); and financials (31 firms; banks, insurance companies, and finance companies).
Far fewer participants from energy/commodity (11 firms) and sovereign (2 firms) sectors.
Approximately 87% of participants were from the US (49%) or Europe (38%).
See questions 2 and 3.
The survey is available here.
Good day. Good indication of what you have experienced? DR2