Woodbine Associates has completed a study for the Institute for Financial Markets (IFM), evaluating the impact of Dodd-Frank and Basel III on over-the-counter (OTC) derivative transactions and cost minimising strategies for end users.
In the wake of new regulation of the OTC derivative markets in both the US and Europe, traders face new capital requirements and transaction costs relative to the size and the particulars of their transactions.
The study, which focuses on the potential impact of margin, capital, execution and market structure under the new regulatory framework on end user derivative transactions, compares the direct and indirect costs of centrally-cleared transactions with those of transactions directly between counterparties and proposes cost-minimising end user hedging strategies.
“Under the new regulatory framework created by Dodd-Frank and Basel III, bilateral hedging will become much more expensive, forcing firms to separate risk transfer from customisation to minimise their costs. Firms should realise substantial savings through replicating or delta-hedging customised transactions with a combination of centrally-cleared ‘vanilla’ transactions to hedge market risk and bilateral basis transactions to address firm-specific needs,” said Sean Owens, author of the research.
The 2011 research and education project will be managed and promoted by the IFM and findings will be released in early 2012.
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