NEW YORK--(BUSINESS WIRE)--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