Wednesday, November 18, 2009

Icap predicts CDS surge

Posted in the Financial Times by Alistair Gray and Jeremy Grant:

Trading in some of the over-the-counter derivatives widely blamed for aggravating the financial crisis is likely to surge if legislators press ahead as expected with proposed reforms, according to Icap, the world’s largest interdealer broker.

Michael Spencer, chief executive, said on Tuesday that along with a rise in electronic trading, the introduction of clearing would expand the market for instruments such as credit default swaps – mirroring the effect that the arrival of electronic trading had on futures, foreign exchange and other asset classes.

“If this revolution does indeed take place, my suggestion would be that CDS volumes and IRS [interest rate swap] volumes will go on a significantly accelerated growth period,” he said. “That would be a punt I would be pretty solid on.”

His comments will surprise many who had assumed that the CDS market was unlikely to return to pre-crisis levels and that certain OTC derivatives had been discredited. It will also raise eyebrows among some US lawmakers who may have assumed that proposed OTC market reforms would limit their growth.

His comments come after similar predictions by Jeff Sprecher, chief executive of IntercontinentalExchange, the US futures exchange and operator of the biggest CDS clearing house. Mr Sprecher said he believed that the CDS market would overtake the interest rate swaps market, partly as a result of clearing.

US lawmakers are, in response to demands by the Obama administration, producing legislation that would require greater use of clearing in OTC derivatives and push more OTC transactions on to formal exchanges and other electronic trading platforms. The European Commission has come up with broadly similar proposals.

Mr Spencer said: “If we are correct that the markets become more cleared – which I think is very highly likely – and that they go electronic, the ramifications for this in OTC volumes are likely to be extremely positive.”

The notional outstanding value of CDS contracts has fallen since 2007, although that is at least in part because the industry has sought to streamline the sector by tearing up redundant deals.

Mark Yallop, Icap’s chief operating officer, argued that improvements in infrastructure were being driven by the market, even before the legislation was finalised and that this momentum was “unstoppable”.

Investment in new ventures, from Brazil to cash equities, dented margins at the group in the six months to the end of September in results announced on Tuesday. Revenue rose from £764m to £809m ($1.4bn), but pre-tax profit dipped from £148m to £139m.

No comments: