Many global institutional investors plan to increase their use of futures contracts at the expense of the over-the-counter derivatives market, in the wake of regulations that will make it more costly to trade swap contracts.
UBS noted “a significant improvement” in attitudes towards using futures products markets as substitutes for OTC trades since its last buyside derivatives survey in March 2011.
The Dodd-Frank Act in the US will force buyside firms to clear most OTC derivative trades for the first time, with some exemptions granted to hedgers. Clearing pushes up trading costs because firms must pay fees to independent central counterparties to guarantee trades, and also post margin against trades as a surety in case of default. From March 11, the first set of buyside investors, which includes active fund managers and other institutional investors with sizable swap portfolios, will be required to clear their derivative trades conducted in the US. Institutional investors face similar burdens in Europe under the European Market Infrastructure Regulation, or EMIR.
Under Basel III capitalisation rulings, futures trades will also attract lower capitalisation requirements on banks’ balance sheets than OTC products. Just over a third, or 39 per cent, of UBS respondents cited this is the most attractive reason to switch to using futures products instead of similar products in the OTC market.
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