Cost of laws on derivatives to reach billions

THE cost of regulatory changes favouring exchange-traded derivatives could cost billions in collateral, according to research firm TABB Group.

The firm says the trend of ongoing changes to the law, which will prompt the transfer of many over-the-counter derivatives such as interest rate swaps onto centralised exchanges, could incur a massive cost for the financial derivatives market.

TABB estimates that moving $42 trillion (£26.8 trillion) of simple interest rate swaps onto exchanges, for example, would cost $240bn in collateral.

The drive to open up the derivatives market to scrutiny and regulation in the wake of the financial crisis “means in practice [that there] is a major push to centralised clearing, optimal use of collateral, and mechanisms to promote greater pre- and post-trade transparency,” says the reports authors.

Despite the cost of moving derivatives onto more traditional trading platforms, however, the research concludes that the move would be “mostly for the better”.

The report also says that over-the-counter and exchange-traded derivatives markets together have an annual turnover of $3.7 quadrillion.