Future options

Tomorrow’s derivatives market looks likely to shift away from exotic products to focus more heavily on centrally cleared vanilla trades. Dealers hope to see a big jump in volumes, which will offset a smaller decline in margins. They also have an eye on new opportunities. But a happy ending is far from certain.

Dealers like to describe reform of the over-the-counter derivatives market as an evolutionary step. In fact, it’s an evolutionary leap – a sudden transformation that is creating huge uncertainty about future volumes, profit margins and competition.

At the heart of the reform agenda is a major shift towards central counterparties (CCPs) that will sit in the middle of formerly bilateral trades, using default funds and margin requirements to mitigate the counterparty risks that paralysed the market