Treasury OTC Proposal To Level Playing Field For Bks -GFI CEO
May 14 2009 - 4:01PM
Dow Jones News
A planned U.S. government skake-up of the derivatives sector
could allow smaller banks to challenge Wall Street's dominance of
the market, according to the top executive of interdealer broker
GFI Group Inc. (GFIG).
The Treasury-backed push toward central clearing and electronic
execution of over-the-counter, or OTC, contracts would curb the
advantage held by large institutions in the multi-trillion-dollar
market.
Michael Gooch, chief executive of GFI, said the large balance
sheets of the dominant banks currently make them a safer
counterparty in bilateral OTC deals.
That has given big banks a lock on the business. Gooch noted a
report from the Office of the Comptroller of the Currency that
showed the top four derivatives dealers in the U.S. holding 94% of
the market at the end of 2008.
"Central clearing will make [OTC trading] more expensive and
reduce margins, but balance sheets will no longer be as important,"
said Gooch, whose company facilitates inter-bank trading across
multiple asset classes.
"It has the potential of increasing the participation and profit
margins of some of the smaller broker-dealer players," he said.
He pointed to Jefferies Group Inc. (JEF), a specialist in
mid-sized companies and a large corporate fixed-income broker,
which doesn't do much credit default swap business.
Gooch said this was because the bank doesn't have the balance
sheet to provide competitive CDS pricing to customers, though the
instruments trade in a somewhat similar fashion to some fixed
income products.
Central CDS clearing, which has been developed by exchanges like
IntercontinentalExchange Inc. (ICE) and CME Group Inc. (CME), would
let banks like Jefferies offer the swaps and other OTC products to
customers, who would be safe from any counterparty risk.
"When you hear about resistance [to clearing] in the dealer
community, I think it's more the eight or nine biggest banks who
are less inclined to have a central counterparty unless they
control it themselves," Gooch said.
For its part, GFI welcomed Wednesday's proposal by U.S.
authorities to bolster oversight of over-the-counter derivatives,
and Gooch said that central clearing will provide improved
transparency, more liquidity and higher volumes in the market.
Inter-dealer brokers like GFI have been hit by a slowdown in
off-exchange trading, as participants shy away from counterparty
risk associated with bilateral deals.
The possibility that mandatory clearing could fuel increased
trade in OTC products sent GFI shares 13.6% higher Thursday to
$5.25.
Whereas other interdealer brokers fretted Thursday that shifting
over-the-counter instruments toward exchange platforms could mean
less business for the IDB sector, Gooch noted that close to 60% of
GFI's business is already centrally cleared.
"Look at the equities markets," Gooch said, which make up about
a quarter of GFI's revenue.
"They're the most highly regulated, transparent and centrally
cleared, yet there's a significant role played by broker-dealers in
execution transaction, research and advice. That's still going to
happen," he said.
Gooch estimated that within two years 80% of GFI's business
would be cleared, with the adoption of the central counterparty
model in credit, currency and interest rate derivatives.
-By Jacob Bunge, Dow Jones Newswires; (312) 750 4117;
jacob.bunge@dowjones.com