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The Decline of Buy-Side Swaps Use
By Nik Venema | June 12, 2014

According to a recent survey by Celent, 55% of asset managers surveyed believe that costs will increase from OTC market reforms that will force them to change the way they trade as well as how the asset is allocated.

Research shows that the industrialization of market infrastructure that has taken place recently with SEFs and CCPs has encouraged and forced buy-side firms to be more operationally efficient. However, allocation strategies relating to mitigating risk are starting to see a chain reaction. Recent research shows buy-side firms are taking into careful consideration the current and future products they are using. As a result, it is expected that interest rate and credit default swaps will experience a large drop in trading volumes, while futures and cash products will see a larger uptake.

With the prospect of more new analytical capabilities being made available in the front office, portfolio managers are requesting  more transparency–before the trade happens–into trade economics in the context of the risk, liquidity and collateral considerations for different products. This demand is also assumed to have a high probability of steering portfolio managers away from trading swaps.

Whether or not this evolution of buy-side risk means it’s all bad news for the market, will unfold in the upcoming months as the growing popularity of alternative investment strategies may offset this decline in the use of buy-side swaps.