The $650 trillion question: Navigating the OTC market maze in a new regulatory era
Miffed about MiFID II? Think Dodd-Frank should be more appropriately named Dead-Frank? Whatever side of the Great Regulatory Debate you're on, the next few months are likely to go down as one of the more crucial periods in modern financial history for OTC markets. Adam Cox and Tarryn Riley spoke to a host of players to get the low-down.
Nearly two years after the Dodd-Frank act was passed, those calling for tighter shackles on Wall Street were handed a gift: the venerable J.P. Morgan had just disclosed spectacular losses from a complex trade gone awry.
Many industry observers said the losses, while tiny compared with what happened to the industry in late 2008, would serve to stiffen the resolve of regulators in the face of loud and vociferous complaints from the industry. What's more, the timing could not have been more critical, with the news coming just as a wave of new rules for over-the-counter markets was about to come crashing down on both sides of the Atlantic.
Others could argue that the regulatory campaign was so far along that the window for adjustments or delays to implementation had already closed. Either way, no one was disputing whether the trading mishap had intensified debate on the wisdom of regulation for a market as large, diverse and complex as the $650 trillion OTC market.
First put at $2 billion but expected to end up being sharply higher, the J.P. Morgan losses came just as regulators were struggling towork out how to implement parts of Dodd-Frank. Events such as these, after all, were just what inspired the sweeping law, the centrepiece of U.S. President Barack Obama's financial reform efforts.
Obama himself was not shy about weighing in. "J.P. Morgan is one of the best-managed banks there is," the president said during a television interview not long after news of the losses. "Jamie Dimon, the head of it, is one of the smartest bankers we got, and they still lost $2 billion and counting."
So what can the industry expect during the coming months as the US and European regulators put the finishing touches on scores of new rules that have far-reaching implications? The answer depends very much on whom you speak to and what positions they have in what has become a very high-stakes game of regulatory roulette.