Nearly two-thirds of market participants have implemented changes ahead of regulatory reform, with 79% expecting central clearing to become a standard feature

NEW YORK, May 25, 2010 — Regulators and market participants are surprisingly aligned on what the key components of a workable derivatives market structure should be in the future, with changes likely to revitalize the listed and over-the-counter (OTC) markets in a manner that benefits all, according to a research report co-authored by BNY Mellon and the TABB Group.

The report, entitled, "Derivatives – Protection without Suffocation: Thriving in a New Era of Regulatory and Market Transformation," found that a consensus is emerging on a global framework that will help to reduce risk through the use of central clearing, increase transparency by moving toward electronic price discovery and execution, and improve market stability by creating new collateral management standards.

"While market participants and regulators are at odds over certain aspects of derivative market reform, our research detected a strong movement toward creating a workable framework that will accommodate stronger regulations and risk reduction without suffocating market activity and ongoing innovation," said Art Certosimo, senior executive vice president and CEO of Alternative and Broker-Dealer Services at BNY Mellon.

Key findings presented in the report - which are a result of a survey conducted with asset managers, broker-dealers and clearinghouses - include:

• 63% of survey respondents have already implemented changes ahead of regulatory reform, with these changes primarily focused in the areas of clearing, front, middle and back office operations, and trading currently being implemented.
• 79% of respondents indicated that they believed central clearing for standard products will reduce systemic risk, while nearly an identical number – 74% – acknowledged central clearing and execution will reduce profit margins;
• 58% of respondents currently do not post or accept collateral when conducting OTC derivatives trades.  In addition, the majority of participants have concerns regarding potential changes in the types and amounts of collateral being used when moving from OTC to cleared environments;
• Nearly half (47%) of respondents are seeing a move towards electronic execution for OTC derivatives products, with the use of algorithms to trade OTC derivatives just starting to emerge;
• 58% of respondents believe that joint oversight of the OTC derivatives market by the Securities and Exchange Commission and Commodity Futures Trading Commission would be a mistake given their different approaches to oversight.

The report also indicates that while changes to the market will initially reduce revenue and profits for participants, in the long term, as a result of increased standardization and volume, revenue and profits will actually increase.

Copies of the full report are available at www.bnymellon.com/derivativescollateral.

BNY Mellon offers a wide variety of solutions for supporting derivatives, including trading and execution, middle- and back-office outsourcing, collateral management, accounting and recordkeeping, reporting, performance and risk analytics, independent valuation and counterparty reconciliation.    

BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation (NYSE: BK). BNY Mellon is a global financial services company focused on helping clients manage and service their financial assets, operating in 34 countries and serving more than 100 markets. BNY Mellon is a leading provider of financial services for institutions, corporations and high-net-worth individuals, providing superior asset management and wealth management, asset servicing, issuer services, clearing services and treasury services through a worldwide client-focused team. It has $22.4 trillion in assets under custody and administration, $1.1 trillion in assets under management, services $11.8 trillion in outstanding debt and processes global payments averaging $1.5 trillion per day. Additional information is available at www.bnymellon.com.