Un-be-lievable! The 2013 NBA and NHL Finals were two of the most exciting championship series in recent sports history. Ratings were through the roof, with the NBA recording its 2nd best basketball viewership ever for the Miami Heat – San Antonio Spurs game seven final, and the NHL orchestrating a Chicago Blackhawks – Boston Bruins Stanley Cup series that goes down as the most watched in NHL hockey history. The Heat may be building a dynasty, but only a remarkable comeback in game six, not witnessed by many fans that had already left the arena in disgust, could preserve their season and make possible a game seven championship. So too, 17 seconds in game 6 powered the champion Blackhawks to tie and then make the go ahead goal for their 2nd Cup in four years.
Injuries served as a dramatic backstory, with the Spur’s Tony Parker suffering a hamstring injury in game 3 of the NBA finals, and the Boston Bruins Patrice Bergeron knocked out of game 5 of the Stanley Cup with a broken rib and punctured lung – only to see both men play on in valiant, losing efforts but forever endearing themselves to fans. As we look back on the first half of 2013, these championship series did not disappoint, with enough upsets, injuries, and surprises to give fans as many near heart-attacks as highlights. You’d be hard pressed to find as much drama and intensity anywhere else, unless of course, you follow the OTC derivatives market as we do. A look back at the dramatic run up in rates, and at the major changes in the market, give clues to what is yet to come.
Upsets. The recent run up in rates caught many people off guard. Bond investors were largely trying to get out in front of anticipated Fed moves, and Chairman Bernanke could do and say little to quash their efforts. Never mind that the Fed’s bond buying program continues, and that no policy change has occurred, it was the thought of being left holding the bond that propelled long term rates up to levels not seen in years. For many, this was the right news but at the wrong time. For those watching interest rates, expecting some major market clue would prompt their actions ahead of time, the rate rout was a major upset. All the planning, polling, and scenario analysis that went into their decisions to hold off on hedging were for naught, moving many into “plan B” mode – hedge now at higher levels or hope for another bond rally and another chance at locking in lower rates. But unlike the NBA and NHL finals, hedging is not a best of seven series. The season goes on indefinitely, so long as business risks go unhedged. Upsets give rise to comebacks, and comebacks are the hallmark of true hedging greatness!
Injuries. It used to be that the biggest worry in OTC derivatives was getting credit, followed closely by getting credit with reasonable terms as your next biggest concern. The ISDA Master and Schedule were but mere ‘formalities’ – not without a dose of negotiation drama, of course – but completing docs meant you had instant access to derivative markets. Hedge what you want, when you want – it’s game on. But sweeping changes under Dodd Frank have put even the biggest hedging all stars on injured reserve for a time. “Did you hear about XYZ Company? I heard they’re out six to eight weeks with an incomplete protocol.” Whether it’s External Business Conduct standards (“EBCS”) in Protocol 1.0, or Swap Trading Relationship Documentation (STRD) under Protocol 2.0, nobody can trade OTC derivatives with their relationship bank if that bank is a swap dealer or major swap participant and they have not agreed to these terms. July 1st marks the deadline for Protocol 2.0, so you are out of the lineup if you are not yet done. The good news is that, once you understand the issues and the process, a protocol rehab assignment can be completed quickly (a couple of days); just pay your $500 to ISDA, sign onto the adherence letter, and match questionnaires with your counterparties. The bad news is that this process for amending relationship documents appears to be here to stay, and only staying on top of these deadlines will keep your team on top.
Other Surprises. The hedging season to date has not been without surprises, of both the good and bad variety. For example, surprise! – Swap Dealers and Major Swap Participants really do have to disclose their mid market pricing to you before trading (most clients have elected oral disclosure). But, as we have quickly discovered, surprise! – they don’t all have the same mid-market levels! It still really does pay to have multiple counterparties and put them in competition for your business, whenever possible. Another surprise is the amount of data and transparency available in OTC derivatives markets now. Whether it’s the list of provisionally registered swap dealers and major swap participants, or the database of derivatives users with legal entity identifiers, or the macro level derivatives market data and reports at DTCC’s swap data repository, the public information now available to regulators and market participants is remarkable given the market’s previous opacity. Of course, it remains to be seen whether all of this data will be useful to market participants.
As with any sport, before you can win a championship, you first have to suit up to play. The 2nd half of 2013 promises no less hedging excitement and intensity. Let us know if we can help you compete and win.