| NEW YORK
NEW YORK Nov 21 The prices paid for trades in
the U.S. derivatives market will soon be made public, a dramatic
change that may accelerate the shift of market power away from a
few dominant financial market players and shed some light on a
traditionally opaque market.
Price transparency is key to the Dodd-Frank reforms of U.S.
financial regulation in 2010 in the derivatives market, where in
some cases prices of actual trades are difficult to verify.
Opaque pricing has made valuing derivatives more difficult and
in some cases has fed panic in markets over the health of
The opaque structure of trading has worked to the advantage
of the large dealers that dominate the market by allowing them
to profit from wider spreads between prices paid and received.
Some large fund managers have also benefited from more
favorable pricing and the ability to game price differences
between the banks.
That may be about to change. Companies that collect trade
data will soon be required to make the price information public.
"It will improve competitiveness and lower search costs for
market participants and it will reduce the oligopolistic power
of the largest dealers," said Darrell Duffie, a finance
professor at Stanford University.
Chief U.S. derivatives regulator, the Commodity Futures
Trading Commission (CFTC), on Tuesday extended the deadline for
reporting until April 10, at the latest.
The information will be closely observed, and will allow
smaller participants to test the quotes they receive against
other investors' trades.
It may also make banks more reluctant to quote more
favorable prices to larger clients, for fear that others will
demand the same treatment.
"It's going to keep people much more careful on what they
price," said Peter Tchir, founder of financial advisory firm TF
Market Advisors, and a former credit derivative trader.
As the financial crisis in 2008 was starting, news of rising
costs to insure debt in companies like Bear Stearns and Lehman
Brothers against default helped feed a negative feedback loop.
Investors, frightened at the prospect of default, took bearish
options positions and started selling bonds and shares of stock.
As those prices plunged, the panic increased.
"I think it's healthier for the market in the long run, it's
one more step toward having a much more electronic trading
environment in fixed income," Tchir said.
THE BOND EXPERIENCE
At least initially, some warn that the shift may add some
market volatility and make it harder to execute large trades.
Some large fund managers have argued that price transparency
may hurt their ability to execute trades if it reveals their
trading strategy, or identity. Dealers also say it could make it
difficult for them to hedge positions made for clients.
Prices will have to be made public with delays that vary by
contract, but those time delays will shrink after the first
year, per the requirements of the CFTC.
Public data will show the contract type, duration, price and
notional size, and the information will be available for
However, the experience of the corporate bond market, which
adapted to new transparency rules after the Trade Reporting and
Compliance Engine (TRACE) system was introduced in 2002,
suggests that fears over liquidity may be overstated.
"Liquidity was not harmed," said Michael Goldstein,
professor of finance at Babson College in Massachusetts, who
published a widely referenced report on the effect of TRACE on
the corporate bond market with colleagues in 2007.
"I suspect it will be comparable" for derivatives, he said.
For bonds, new transparency also helped reduce trading costs
in the market.
"Spreads went down pretty soon (after its introduction), and
there was evidence that the effects got even stronger over
time," Goldstein said.
Some confusion in the market relating to which swaps are
eligible, however, may restrict the amount of trade data
ultimately made public.
Dealers are grappling with which entities and trades are
covered under other rules meant to reduce the risks of overseas
trading harming U.S. companies.
"Without any clarity on the cross-border issues, it's still
unclear as to which swaps are going to have to be reported,"
said Evan Koster, a partner at law firm Hogan Lovells in New
Some also fear that technological issues relating to how
banks route information to swaps data repositories could also
Representatives of swaps data repositories, however, say
they are ready to provide live prices.
Marisol Collazo, managing director of the trade information
warehouse and global trade repository services at the Depository
Trust & Clearing Corporation, said the company is ready to
provide continuous price streams by asset class and product and
will offer RSS feeds on its Web site.
Bruce Tupper, president at ICE Trade Vault, part of
IntercontinentalExchange in Atlanta, said ICE is also
ready to distribute the data in real time and apply filters for
each required price delay and to anonymise trading partners.