Fitch: Inter-Dealer Brokers Face Regulatory Challenges with Some Longer-Term
NEW YORK -- October 2, 2013
Inter-dealer brokers (IDBs) face significant regulatory challenges with the
potential for disruption in established revenue streams, according to a new
Fitch Ratings report. However, there are positive opportunities for some
industry players over the longer term.
Financial regulators in the U.S. and Europe have pushed for greater
standardization of over-the-counter (OTC) derivative contracts, supporting
electronic price discovery, trade execution and reporting, and mandating
central counterparty (CCP) clearing to reduce systemic risk.
IDBs are facing tougher competitive challenges as much of their core OTC
business migrates toward exchanges and CCP platforms. However, Fitch believes
that larger IDBs that already have electronic trading capabilities and
liquidity could ultimately benefit at the expense of smaller less-capitalized
IDBs. Greater use of CCPs will mean that some less liquid products will see
increased trading volumes and liquidity, albeit at lower margins/commissions.
Revenue stability will depend on the ability of volume growth to compensate
for lower fees.
Fitch recently downgraded three IDBs' ratings, partly reflecting the proposed
regulatory changes. The changes could potentially shrink IDBs' revenue bases
due to increased competition in trading OTC products, lower
margins/commissions for electronic trading platforms relative to voice/hybrid
platforms and increased costs related to trade reporting, compliance, capital
and risk management.
Fitch currently rates four interdealer brokers: ICAP plc ('BBB/F3', Outlook
Stable), Tullett Prebon plc ('BBB-', Outlook Stable), BGC Partners Inc.
('BBB-/F3', Outlook Stable) and GFI Group Inc. ('BB/B', Outlook Negative).
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research: Inter-Dealer Brokers: Challenges and
Opportunities from New Regulations
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Fitch Ratings, Inc.
Mohak Rao, CFA, +1-212-908-0559
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
Brian Bertsch, +1-212-908-0549
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