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A financial reform bill is produced in Washington with speculation whether the new law would alter swaps trading once it is formally passed. This law seems to come as a relief to the banks which have had dominance on over-the-counter derivatives. This is so because, according to the new legislation, banks will no-longer use separate entities in revolving off derivatives such as interest rate (Mackenzie, 2010). Despite the fact that some commodities such agriculture, energy can be cleared, their derivatives would be spun off.
Most leading banks seem to have succeeded in insulating their profitable derivative franchise through utilizing interest rate which has accounted for more than seventy percent of the exceptional global OTC derivatives. The regulators in the banking industry will have new roles and goals to meet such as coming up with a clear way of executing swap facility that must be understood by all the stakeholders (Mackenzie, 2010).
The entrenchment of the electronic trading is determined and the mode of clearing swaps that caters in for the current customers and competitors of the select banks.
Advantages of the electronic trading are evidenced in its transformation of buying and selling government bonds, energy, equities and currencies (Mackenzie, 2010). Electronic trading usually bridges the gap between sellers and buyers thus reducing monopoly of any firm that is currently in the market by giving new entrants a chance.
The introductions of the electronic trading, traders who have put in place computers with high-frequency are key elements in process. Electronic trading shall help the new entrants in the market trade directly with the big banks thus making interest rate swaps real since they will no-longer be their clients.
If such a trading occurs, the profits of the big dealer’s ill decrease and this will help in distributing the risk on top of making the price of the swaps transparent.
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