Despite regulations meant to reduce systemic risk by paring big dealers’ share of the derivative markets, corporations are still using interest-rate derivatives much as they did before the financial crisis. That is, they’re still doing their swap trades with a small, core group of dealers, according to a study from consultant Greenwich Associates.
“Corporate users of interest-rate derivatives globally continue to concentrate over three-quarters of their business with their top three dealers and over 40 percent of that volume with a single primary dealer,” according to Greenwich. “This continues a pre-reform derivatives market trend for corporate end-users, who have concentrated 75–80 percent of their business with their top three dealers over the past eight years.”
In the wake of the financial crisis, the G20 agreed to a series of measures to increase the transparency of the OTC derivatives market and to reduce systemic risk. But while the OTC market is used by a wide array of players, it is dominated by a limited number of dealers, which provides liquidity to the market and manages the risk exposures through offsetting transactions in the underlying assets. Because of this concentration, the G20 sought to dilute the big dealers’ share of the OTC markets. The Greenwich report says that G20 rules are having a slight impact on financial end-users but very little “to no impact on corporate use of, and dealer selection for, trading interest-rate derivatives,” according to research from Greenwich Associates.
Greenwich says this is in large part due to swaps clearing and trading mandates that haven’t yet had an impact on corporate end-users. But this could be “short lived,” Greenwich says. “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,” said Kevin McPartland, the head of research for market structure and technology at Greenwich.
On the other hand, among financial end-users Greenwich said, there has been a shift toward a more diverse dealer list for interest-rate swaps “where derivatives reform is furthest along.” Greenwich said the average number of dealers used to trade interest-rate swaps by financial end-users was up 15 percent from 2007 to 2014.
Mr. McPartland said the trend of diversifying counterparty mixes seen in the financial sector will eventually “work its way to corporate derivatives users in the coming years, but as our research shows, that time has not yet arrived.”