Reforms may help some brokers

Wholesale brokers, often called interdealer brokers, already work to set prices between derivatives dealers and have a large presence in the market. The firms, which set up the Wholesale Markets Brokers’ Association, Americas (WMBAA) trade group last year, may win new business with parts of the market likely shifting to swap execution facilities.

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“To the extent that policymakers are criticizing the U.S. OTC swaps market for being unregulated, I think that the greater legitimacy that regulation may bring will be helpful to the markets. The WMBAA supports more effective regulation of the U.S. swaps markets,” said Christopher Giancarlo, chairman of the association. “We think properly regulated markets are good for business. Regulated markets tend to have good, healthy trading volume, and we make money from volume.”

Legislation in the House and Senate would encourage standardized derivatives to be traded on either fully electronic exchanges or on the execution facilities, which could function electronically as well as with human brokers.

Market analysts say many interdealer brokers will soon function as swap execution facilities, a designation that would be put into law for the first time as part of the overhaul package.

“I think the majority of trading is going to go through swap execution facilities,” Kevin McPartland, senior analyst at TABB Group, told The Hill. “The swap execution facilities, the interdealer brokers, already have platforms to deal swaps.”

Niamh Alexander, a research analyst at Keefe, Bruyette & Woods, said in April that the legislation could increase revenue for exchanges and interdealer brokers by up to $500 million in 2011 and by up to $1 billion in 2012. Alexander said it is too early to tell exactly how much of the market will shift to exchanges versus brokers.

“We do think the fact that you have this new intermediation function, it’s an opportunity for the interdealer brokers to expand their market share,” Alexander said. “And it’s an opportunity for the exchanges as well.”

BGC Partners, GFI Group, ICAP, Tradition and Tullett Prebon Ltd., five of the largest interdealer brokers in the U.S. market, set up the trade association last July to flex their muscle as lawmakers embarked on the Wall Street overhaul. The association hired Patton Boggs, the perennial K Street powerhouse, and spent $580,000 lobbying lawmakers during the past year.

The association has testified to Congress that wholesale brokers are necessary to ensure competitive pricing in the derivatives market and has warned against the potential for exchanges to operate as monopolies.

“They are not equipped to provide the most competitive pricing for buyers and sellers in the markets when the number and array of products and terms becomes much more numerous and varied,” the association wrote to senators in March, referring to exchanges.

The association warned lawmakers against shifting trading solely to electronic exchanges, arguing that some products are so specialized that continuous electronic markets would not provide the most competitive prices.

Some lawmakers, including Sen. Tom HarkinThomas (Tom) Richard HarkinDem Senator open to bid from the left in 2020 Senate GOP rejects Trump’s call to go big on gun legislation Trump should require federal contractors to follow the law MORE (D-Iowa), have expressed concern that the market will not be transparent if it is not on an electronic exchange.

“As a conferee, I will continue to study this issue closely to make sure that these trades are executed in the open, just like the markets for stocks and commodity futures,” Harkin said in a statement.

Alexander said derivatives dealers, which are mostly major Wall Street banks, could set up their own execution facility separate from the wholesale brokers.

Banks took in $23 billion in trading revenue on derivatives in 2009, according to the Office of the Comptroller of the Currency. The market is highly concentrated, with 97 percent falling in the hands of five large banks.