Banks To Be Among Winners Of OTC Derivatives Overhaul -Report

NEW YORK (Dow Jones)–Banks will be among the biggest winners in the new regime global regulators are writing for the $583 trillion market for privately traded derivatives, while swaps users will see “very little change in overall economics,” according to a report released Thursday from Morgan Stanley and consultancy Oliver Wyman.

The assessment runs counter to earlier speculation that banks’ revenues would suffer in the wake of the overhaul, with regulators trying to break the grip derivatives dealers have on the market and drive prices lower for the benefit of corporations hedging legitimate business risks.

Dealers make $30 billion to $40 billion in revenue globally each year making markets in over-the-counter swaps, said Robert Urtheil, partner at Oliver Wyman in Frankfurt, compared with $3 billion to $4 billion each year on exchange-traded futures.

While the overhaul may erode margins on OTC contracts by 5% to 10% annually–an estimate based on interviews and analysis of other markets that underwent similar changes–this will likely be offset by increasing volumes resulting from more efficient execution and new entrants, the report added.

“The threat that was coming was huge, so we see [banks] as winners, preserving the market structure,” said Urtheil. “The effect of regulation will probably not be as dramatic over time.”

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