The financial landscape has changed forever today.
With March now over, we’ve officially completed our first quarter under new U.S. clearing rules for swaps.
It’s all part of new Dodd-Frank rules aimed at bringing transparency to the $600 trillion derivatives market. During the last quarter, buyers and sellers of swaps had to start trading these derivatives through central clearing houses.
Meaning that the world is finally getting a clear look at volumes and prices for these instruments.
Some swaps traders began reporting their trades in late December. The majority commenced clearing on March 11.
The question now is: does price discovery start affecting the market? The stated aim of the clearing rules is to hang solid prices on traded swaps products. The implication being that holders of similar assets will be forced to mark values to the newly-daylighted market.
Some firms were likely using the previously opaque, over-the-counter market for derivatives as an “out” to carry their swaps holdings at inflated values. The new clearing rules will be a swift reckoning for these holders. Potentially leading to big write-downs on derivatives portfolios.
We’ll see if signs of the change start showing up in financials for the January to March quarter. The March 11 implementation may mean the effect will be small for now. But this is a good time to look for warning signs of bigger problems coming, as we move into a new era of financial regulation.
Here’s to keeping your head up,