Friday, September 25, 2009

Goldman to benefit from new OTC derivatives rules: Citi

Posted on Reuters by Tenzin Pema:

Goldman Sachs Group Inc expects to benefit from the new over-the-counter derivatives and commodity trading rules owing to its strong technology position, said a Citigroup analyst, who met with Goldman management, and raised his earnings outlook for the bank.

"Standardized central clearing of OTC derivatives are likely to force a major electronification of derivatives trading, which may play to Goldman's advantage given their existing technology platform and expertise in high volume electronic trading," Citigroup analyst Keith Horowitz said.

Taming the over-the-counter (OTC) derivatives market -- a "shadow banking system" of enormous size now largely beyond government reach -- is a key part of a push for tighter government oversight of banks and capital markets under way now for six months.

"Standardized" OTC derivatives would go through clearinghouses at regulated exchanges to reduce the risk of default. OTC derivatives are complex instruments whose value is based on an underlying asset.

Horowitz, who recently met with Goldman's Chief Financial Officer David Viniar, said the new rules, which could set mandatory minimum collateral and margin requirements, if enacted are expected to benefit the bank relative to its peers.

Goldman has historically had among the most stringent collateral and margin terms versus more generous peers, who too often cut deals with easy credit terms to win business, said Horowitz, who also met Goldman's Chief Operating Officer Gary Cohn and investment banking head David Solomon.

"We are more optimistic on Goldman's long-term prospects and gained comfort that worst-case outcomes from regulatory reform are unlikely to materialize and structurally impair returns," Horowitz wrote in a note to clients.

Global policymakers agree that the OTC derivatives market should be regulated after a type of derivative, credit default swaps, led to insurer American International Group's (NYSE:AIG - News) near collapse and $180 billion government bailout.

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