Derivatives proposals suit smaller players

NEW YORK Thu Nov 19, 2009 2:54pm EST

Lee Fensterstock, CEO of Broadpoint Gleacher, speaks at the Reuters Global Finance Summit in New York, November18, 2009. REUTERS/Brendan McDermid

Lee Fensterstock, CEO of Broadpoint Gleacher, speaks at the Reuters Global Finance Summit in New York, November18, 2009.

Credit: Reuters/Brendan McDermid

NEW YORK (Reuters) - The over-the-counter derivatives market is facing potential upheaval as lawmakers seek to increase regulation but while large banks are worried this could harm what has been a lucrative business for them, some niche players see new opportunities.

Lawmakers and regulators have proposed requiring that certain transactions in the $450 trillion OTC derivatives markets go through exchanges or similar platforms. This has some smaller financial firms looking to see how they might benefit from the shake-up, participants told the Reuters Global Financial Summit.

"We see (the proposals) as an opportunity," said Lee Fensterstock, chief executive of boutique investment bank Broadpoint Gleacher Securities Group BPSG.O.

The OTC market in the past was dominated by the largest banks, since counterparties in OTC trades have credit exposure to each other. As a small company, Broadpoint could not effectively be in this business, Fensterstock said.

Four large banks -- JPMorgan Chase & Co (JPM.N), Goldman Sachs Group (GS.N), Bank of America Corp (BAC.N) and Citigroup Inc (C.N) -- control over 90 percent of the U.S. derivatives market.

"To the extent that you create exchange-like structures to trade (derivatives), that then would allow a firm like us to really participate," Fensterstock said. "I think it's the right thing for the markets to do."

In addition to trading OTC derivatives on exchanges, proposals from the Obama administration would also allow market participants to use a so-called "alternative swap execution facility."

Inter-dealer brokers, who stand between trade counterparties, are well-placed to become such facilities, said Howard Lutnick, chief executive of Cantor Fitzgerald.

"All five of the big inter-dealer brokers either have the capacity or can get the capacity relatively quickly," he said.

These brokers, as alternative swap execution facilities, would be able to capture information on the OTC market and report it to help regulators supervise derivatives, he said.

The derivatives proposals are part of sweeping financial reforms proposed by lawmakers to fix the financial system and prevent another credit crisis.

U.S. President Barack Obama has pushed lawmakers to wrap up their efforts by year-end, but the process may drag into next year as Congress wrangles over details.

(Reporting by Elinor Comlay; Editing by Phil Berlowitz, Gary Hill)