Dwight Cass writing in International Treasurer poses the question, ' Will corporates make the move to exchanged-traded swaps?'. He believes that corporate exemption from interest-rate swap clearing in the new environment will vary. The amount of basis risk and the importance of obtaining hedge accounting, among other factors, need to be weighed against the expected rise in the cost of swaps, as dealers move to recoup the higher cost of regulatory capital on bilateral transactions.
He writes that dealers believe that only 20 percent of OTC derivatives will remain non-cleared after US Dodd-Frank and EU EMIR and MiFIR clearing and capital regulations kick in. Dealers expect that the cleared OTC market will resemble the bond market, with the majority of deals privately negotiated, publicly reported and centrally cleared.
The rest of the article reviews: 1. how the amount of basis risk and the importance of obtaining hedge accounting, among other factors, need to be weighed against the expected rise in the cost of swaps; 2. the alternatives if OTC rate hedging becomes uneconomical or the regulatory bias headaches make it too risky; and 3. the advantages of the ease of termination of exchange-traded product, but warns that it is not a panacea.
Read more in the full article - highly recommended - here.
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