March 11, 2024 — Efficiency efforts in the derivatives market are being driven both by headwinds in the form of regulation and economic pressures, and the tailwind of strong projected volume growth amid continued global market volatility.
Nearly 70% of the 210 derivatives market participants contributing to a new study by Coalition Greenwich in partnership with FIA said the derivatives clearing business must enhance capital efficiency to generate needed capacity and support future growth.
“Derivatives are an integral component of the financial and asset management ecosystem and the potential for increasing volatility in an environment of elevated interest rates and economic uncertainty has shined a spotlight directly on the market structure that supports these instruments,” says Stephen Bruel, Senior Analyst at Coalition Greenwich Market Structure & Technology and author of Derivatives Market Structure 2024: Focusing on Capital and Workflow Efficiency.
In the U.S., the Federal Reserve and other banking regulators have proposed new rules that could make it far more expensive for banks to clear derivatives for their clients. In fact, half the study participants ranked capital management as the top issue facing the industry in 2024. Market participants also cite additional regulation, operational challenges and geopolitical risks as top priorities. Conversely, study respondents see a series of trends that could power growth in derivatives trading volumes, including volatility from macroeconomic uncertainty, improved access for foreign investors to markets in China and India, and the increasing participation of retail investors.
Although a sizable minority of market participants believe generative AI is on the brink of transforming derivatives trading and clearing workflows, the most impactful solutions could be much simpler.
“Accommodating additional volumes and complexity requires an improved operating environment,” says Stephen Bruel. “In a high-volume/low-margin business rife with manual intervention, both intermediaries and their clients are keen to increase straight-through processing. For intermediaries in the derivatives market, the development and adoption of operational standards at the global level would be a game changer.”
Derivatives Market Structure 2024: Focusing on Capital and Workflow Efficiency identifies the biggest challenges and growth opportunities facing the derivatives industry and analyzes the improvements to market structure, technology and workflows that market participants believe will be needed to accommodate expansion in global trading volumes.