Market Overview

ISDA Publishes Future of Derivatives Survey at 33rd ISDA Annual General Meeting

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Derivatives industry participants are optimistic about the future of
derivatives markets, but have flagged a number of important changes that
will have an impact on the future of the business, according to a new
survey published by ISDA to coincide with the start of the 33rd
ISDA Annual General Meeting (AGM) in Miami.

Asked about their expectations for overall derivatives activity, 83% of
respondents to the ISDA Future of Derivatives survey thought volumes
will increase or remain the same over the next three to five years. The
same proportion felt end-user activity will rise or remain unchanged
over the same period. When asked to rate their optimism about the future
of derivatives on a scale of one to 10, with 10 being the most
optimistic, 65% opted for between seven and 10.

Despite this optimism, market participants see challenges ahead. About
half of the respondents believe the number of derivatives dealers will
decline over the next three to five years, and almost two-thirds expect
the cost of using derivatives to increase. Several factors appear to
underlie these concerns. Market participants remain wary about the
challenges posed by regulatory compliance. On a scale of one to 10, with
10 being the most challenging, 66% of respondents rated this between
seven and 10. This was above benchmark reform (53% between seven and 10)
and Brexit (44% between seven and 10).

"While significant progress has been made in implementing regulatory
reform initiatives, regulatory compliance continues to be a major focus
for the industry," said Scott O'Malia, ISDA Chief Executive. "This
underscores the need to calibrate the regulatory framework to ensure it
is risk appropriate, while at the same time working to develop industry
solutions that bring greater standardization and automation to the
derivatives markets."

"Our survey shows that end-user activity is expected to remain at
current levels or even increase in the coming years, emphasizing the
value of these products as a means of transferring risk efficiently.
These instruments continue to be used by end users because they serve an
important economic and social need. It's therefore vital that firms are
able to continue accessing these markets in a cost-effective way," said
Eric Litvack, ISDA's Chairman.

Another big trend highlighted in the survey is the emergence of new
technologies like distributed ledger, artificial intelligence and
cryptocurrencies. Asked to rate their impact on derivatives markets over
the next three to five years, 52% of survey respondents scored it
between seven and 10. More than 50% believe the potential cost savings
from technology will be felt in all areas of a firm's derivatives
operations – from trading to the mid and back office.

"New technologies are likely to bring greater efficiencies and cost
reduction to the derivatives market, but we need to ensure we retain
and, where necessary, adapt the standards, definitions and documentation
that have brought more than 30 years of consistency and legal certainty
to the derivatives market. This is critical for the safe, efficient
functioning of this market," said Mr. O'Malia.

The 33rd ISDA AGM takes place in Miami on April 24-26.
Focusing on the future of derivatives markets, this year's AGM will
explore how the industry is using new technologies, and how it is
planning for benchmark reforms, Brexit, the future of non-cleared
derivatives and changes to capital rules. Keynote speakers include Bill
Coen, secretary of the Basel Committee on Banking Supervision, J.
Christopher Giancarlo, chairman of the Commodity Futures Trading
Commission and Craig S. Phillips, counselor to the secretary of the US
Treasury.

Highlights of the survey:

  • 83.3% of respondents think overall derivatives volumes will increase
    or remain the same over the next three to five years.
  • 83.1% think end-user activity (hedging and trading) will increase or
    remain the same over the next three to five years.
  • 51.8% think liquidity in the interest rate derivatives market will
    increase over the next three to five years; 53.7% think the same for
    the FX market. The proportion is much smaller for credit, rates and
    equities. In fact, 23.6% of respondents think liquidity in the credit
    derivatives market will decrease.
  • Asked how optimistic they are about the future of the derivatives
    market on a scale of one to 10 (with 10 being most optimistic), 65% of
    respondents opted for between seven and 10.
  • Asked what impact new technologies like distributed ledger, artificial
    intelligence and cryptocurrencies will have on the derivatives market
    over the next three to five years, 52% of respondents scored it
    between seven and 10.
  • Asked how big a challenge regulatory compliance, benchmark reform and
    Brexit will be on a scale of one to 10 (with 10 being the greatest
    challenge), 66%, 53% and 44% of respondents, respectively, opted for
    between seven and 10.
  • 63.9% of respondents felt the cost of using derivatives would increase
    over the next three to five years.
  • 47.3% think the number of derivatives dealers/market-makers will
    decrease over the next three to five years.

The ISDA Future of Derivatives Survey drew more than 900 responses in
total. Approximately a third of the responses came from dealers, 43%
came from people working at buy-side institutions (including bank end
users, pension funds, energy companies, asset managers, insurance
companies, non-financial corporates and government/supranational
entities). The remaining responses came from infrastructure providers,
fintech companies and law firms.

Click here
to read the full survey.

About ISDA
Since 1985, ISDA has worked to make the global
derivatives markets safer and more efficient. Today, ISDA has over 900
member institutions from 68 countries. These members comprise a broad
range of derivatives market participants, including corporations,
investment managers, government and supranational entities, insurance
companies, energy and commodities firms, and international and regional
banks. In addition to market participants, members also include key
components of the derivatives market infrastructure, such as exchanges,
intermediaries, clearing houses and repositories, as well as law firms,
accounting firms and other service providers.

Information about ISDA and its activities is available on the
Association's website: www.isda.org.
Follow us on Twitter @ISDA.

ISDA® is a registered trademark of the International Swaps and
Derivatives Association, Inc.

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