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The impact of regulation on the structure of European over-the-counter derivative markets

The impact of regulation on the structure of European Over-the-Counter derivative market

Background

Over-the-counter (OTC) derivative markets face unprecedented regulatory reform. Regulators and policymakers are seeking more transparent and liquid markets that are subject to robust and effective risk management processes.  The EU will primarily introduce these changes through the Review of the Markets and Financial Instruments Directive (MiFID) and the European Markets Infrastructure Regulation (EMIR). Firms will also need to account for changes to the capital regime through the Capital Requirements Directive (CRDIV).

In aggregate, these reforms will change the way OTC derivatives are traded and the resulting risks managed. There is broad agreement on several outcomes: significantly less business will be transacted bilaterally; new trading venues will enter the market; and much more information will be available to market participants. But there is less clarity on the likely impact for end-users and market liquidity.

We have identified five main areas of impact on:

  • Volume of business traded OTC
  • Venues
  • Product offering
  • Pricing
  • Market liquidity

This note sets out our view on how the structure of EU OTC derivatives markets will change as a result of these historic reforms.

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