I’m being hyperbolic. A little.
Today is the last–and most major–implementation date for new derivatives trading rules in the U.S.
Starting this morning, all traders of swaps (the biggest category of global derivatives) will be required to trade these instruments through central clearing houses. This includes large institutional investors.
Smaller groups of swaps traders have already begun cleared trading. Swap dealers and active private funds started in March. And third-party investment managers began in June.
But today’s group is the biggest shoe to drop yet. And signals a major change in the massive global derivatives market.
Prior to this, swaps were traded in person-to-person transactions. No one outside knew pricing or volumes for the transactions.
But the new central clearing houses firing up today will be collecting all trade information. And reporting it. In many cases, near real-time.
This will at long last bring price discovery to the swaps market. Up until now, holders of such instruments were able to value swaps according to their own internal models. But no more. The market will now decide what swaps are worth.
Hopefully the discovered market pricing is close to what holders have modeled. The global swaps market is worth $456 trillion, according to Bank of International Settlements. Even a 1% write-down on that amount would dwarf the financial loses we saw in 2008.
Remember this date.
Here’s to being ready,
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