Survey: Derivatives Trading to Grow Despite Rising Costs

In a new survey conducted by the International Swaps and Derivatives Association (ISDA), a majority of respondents said that they expect derivatives volumes to stay flat or increase in the future, despite also predicting that the cost of trading these products will increase.

Asked about their expectations for overall derivatives activity, 83% of those surveyed said that they 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.

Yet, 63.9% of respondents felt the cost of using derivatives would increase over the next three to five years, and 47.3% think that the number of active derivatives dealers or market makers will decrease over the same period of time.

The results of the survey suggest that the challenges posed by regulatory compliance, the need for benchmark reform and Brexit are the key causes for concern regarding the future of derivatives trading..

“While significant progress has been made in implementing regulatory reform initiatives, regulatory compliance continues to be a major focus for the industry,” says Scott O’Malia, CEO of ISDA. “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 standardisation and automation to the derivatives markets.”

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,” says O’Malia.

The ISDA 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 and the remaining responses came from infrastructure providers, fintech companies and law firms.

Galen Stops

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