Comply, Protect or Grow?

Talking with a client recently they gave me an interesting perspective on the new OTC derivatives regulations that will be hitting the markets.  Their question was – comply, protect or grow? 

Dodd-Frank and EMIR will be radically re-shaping the OTC derivatives marketplace by the end of 2012.  The Tabb Group in a recent report predict that transaction volumes could increase 20 times and market data 4 times with a shift away from exotic to vanilla products.  It gives banks three potential routes:

• Comply – do the minimum that is necessary to be able to comply with the regulations in the short term and see how things evolve
• Protect – do what we need to do to make sure that we protect our market position against our competitors ie provide basic client clearing services
• Grow – use the rule changes as an opportunity to grow our market share in particular geographies or asset classes ie offer value-added services such as collateral transformation that will enable us to take share off our competitors

The new world is likely to be characterised by fierce competition for standardised products where scale, operational efficiency and cost per trade are going to be the key principles so the “grow” option is going to require significant investment in processes and technology.  From our contacts in the market we can see that there are leading players out there who have realised this and are making those investments.  This could lead to a major shake out in the wholesale banking landscape.

So what do you think banks are going to do? comply, protect or grow?