The International Swaps and Derivatives Association, Inc. (ISDA) has released a new survey, which found that over 55% of derivatives end users are of the opinion that markets are fragmenting along geographic lines as a result of regulatory change.
The survey conducted by ISDA included a panel of 376 end users, comprising of non-financial corporates (22%), asset managers (23.9%), and financial institution end users (31.4%).
A closer glance suggests that fragmentation is occurring as a result of inconsistent timing in the implementation of a laundry list of new regulations across jurisdictions. Furthermore, the differentiation of rules that participants are obligated to heed has made it operationally challenging to trade across borders.
In addition to fragmentation woes, the ISDA survey found that 56.6% of derivatives end users think that regulatory change has a negative impact on their risk management abilities. This was also reinforced by 36.2% of respondents, who felt that liquidity had deteriorated over the past year.
Over a third of the respondents in the survey, or 34.4%, thought the number of dealers willing to offer prices on derivatives transactions had diminished YoY as well. This is not the first such example of stifling regulatory reforms, especially when weighed against constraints on bank capital, liquidity and resources.
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Approximately 53% of respondents in the survey also thought the cost of hedging had increased over the past year. Hedging costs actually came in as the most paramount concern for end users, registering 61.5%, followed by uncertainty about home-jurisdiction (44.9%) cross-border regulation (39.7%), and concerns about shrinking dealer availability (38.5%).
According to Scott O’Malia, ISDA’s Chief Executive Officer, “This survey shows that inconsistent application of derivatives regulations across borders is having an impact on the ability of end users to hedge their risk. Most think markets are fragmenting and costs are rising,”
“Constraints on bank balance sheets are also being felt, with roughly a third of respondents pointing to fewer dealers and a reduction in liquidity. This is now starting to have an effect on the ability of end users to hedge their risk effectively,” he added.
Earlier this year, ISDA conducted an OTC derivatives analysis for the greater industry, concluding that a duality of policy goals were being accomplished. More specifically, two key policy goals of increased clearing and portfolio compression were achieved by the derivatives industry. This included a recent rise of compression volumes that helped erode in publicly reported interest rate derivatives notional outstanding figures.
In addition, ISDA has appointed two new directors in a recent election – these include Yasunobu Arima, General Manager, Global Markets Planning Division, The Bank of Tokyo-Mitsubishi UFJ, Ltd (BTMU) and Sam Skerry, Global Head of Structured Products and IST Commercial Support, BP plc.
According to Eric Litvack, ISDA Chairman in a statement on the election results, “We welcome Arima-san and Sam to the ISDA Board of Directors and look forward to working with them as ISDA continues to ensure that the global derivatives markets remain safe and efficient. ISDA will benefit greatly from their experience and expertise across various market segments and regions.”