Reuters: Regulatory News: Price reporting for rate swaps may aid market-Fed study

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Price reporting for rate swaps may aid market-Fed study Mar 27th 2012, 17:00 By Ann Saphir March 27 | Tue Mar 27, 2012 1:00pm EDT March 27 (Reuters) - Shining a light on prices in the opaque over-the-counter market for interest-rate derivatives is unlikely to hurt liquidity in the $550 trillion market and may improve it, according to a study published on Tuesday by the New York Federal Reserve Bank. The study, based on detailed and previously unavailable derivatives trade data, comes as regulators globally step up oversight of derivatives, where unbridled trading is thought to have made the 2007-2009 financial crisis worse. Unlike regulated futures markets, where prices are continually updated electronically for the world to see, interest-rate derivatives in the over-the-counter markets change hands privately at prices known only to the participants. Regulators in the United States and elsewhere have argued that making swaps prices more widely available is an important way to make derivatives trading safer as well as fairer. In findings that largely back those arguments, the New York Fed analysis showed that because much of the market for swaps and other rate contracts is highly standardized, publishing prices at which contracts trade "may result in timely and pertinent price information for market participants." TRANSPARENCY AND SAFEGUARDS Even prices for large swaps transactions can be reported without making it unduly hard for dealers to protect themselves from market swings, "as long as adequate trade size masking or reporting delays are in place," it said. Last week, New York Fed President William Dudley endorsed a global push to strengthen clearinghouses, which under new rules in the United States, Europe and other countries will start to guarantee many of the swaps trades that now take place outside of regulated markets. Policymakers want to force traders to report the prices at which they buy and sell over-the-counter contracts, but face resistance from some market participants who worry that too much transparency could reveal their strategies or make it hard for them to hedge their risk, forcing them to withdraw from the market. Using trade data from 14 large swaps dealers over a three-month period in 2010, New York Fed researchers found that dealers are able to offset much of the risk from large trades with customers within 30 minutes, suggesting that posting prices after that time may not disrupt dealers' ability to hedge. While most interest-rate transactions over the three-month period studied were quite standardized and frequently traded, about 40 percent were too customized for after-the-fact price reporting to be very useful, the report said. "For many of these instruments, pre-trade quoted prices will likely continue to be the most meaningful source of information for prospective investors," the report said. Still, reporting prices even for infrequently traded, customized contracts is unlikely to disrupt the market, the report said. And as derivatives become more tightly regulated, traders may begin to favor more-standardized contracts, where price reporting can help markets function better, the study said. Link this Share this Digg this Email Reprints

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