Thought Leaders: Donna Parisi on the Derivatives Industry
Donna Parisi, a Partner at global law firm Shearman & Sterling, recently sat down with theglasshammer.com to share her thoughts on the future of the derivatives industry. Donna was profiled on the site in 2010 when she participated in our “Top Women on the Buyside” management event, which she will be chairing again this year. Since 2010, Parisi has assumed the roles of co-head of Shearman & Sterling’s Asset Management Group and head of the Derivatives and Structured Products team. Over the past few years, Donna has been focusing on financial regulatory reform matters. At London’s Chatham House Conference on Global Financial Markets on March 17, Parisi will be discussing cross border derivatives harmonization.
The Glass Hammer: What is the outlook like for the derivatives industry at large?
Donna Parisi: The OTC derivatives industry, which has only been around for about 30 years, has constantly innovated and I believe will continue to do so. Over time products become commoditized and profits compressed, but new products have been introduced to meet customer and market demand. The inherent power and beauty of a derivative instrument is the ability to link it to an unending supply of asset classes limited only by a financial professional’s creativity. I believe the outlook is bright – different from what it has been in the past – but one of opportunity.
TGH: What impact does the most recent regulation have on the industry?
DP: The three central tenets of Dodd-Frank are improving transparency, mitigating systemic risk and protecting against market abuse. The regulations attempt to improve transparency in what has been called an “opaque” derivatives market by requiring exchange trading of more liquid derivatives instruments and requiring reporting of all derivatives transactions. Systemic risk is addressed by requiring liquid derivatives transactions to be centrally cleared and providing for higher margin requirements for uncleared instruments. Registration and regulation of major market participants such as swap dealers are intended to prevent market abuse and give regulators greater enforcement powers. Both the sell side and buy side are well past debating the need for or efficacy of new regulations and instead are fully focused on implementation and getting back to business. One major implementation challenge is compliance with regulations across multiple jurisdictions that are substantively similar as a policy matter, but differ in the details, presenting compliance complexities in what is a global marketplace. Related to this is the need for major infrastructure build-outs, including on unrealistic timeframes imposed by regulators on the technology side.
TGH: What do you think is keeping senior execs in derivatives up at night?
DP: What worries senior industry professionals are liquidity and capital. A perhaps unintended consequence of the new regulations has been fractured pools of liquidity largely resulting from cross-border issues such as broad extraterritorial scope, differing regulatory implementation timelines and a lack of mutual recognition of regulatory schemes in other jurisdictions. What does this fractured liquidity mean for the market? Who will the winners and losers be? What will be the impact on pricing and spreads? In some ways, capital considerations instead of regulatory requirements are driving business decisions. What capital is needed to support my business, and do my returns justify this allocation? I expect that in the next few years banks will be scaling back or even abandoning more capital-intensive businesses, perhaps creating opportunities for other credit intermediaries.
By Nicki Gilmour, CEO theglasshammer.com
This week The Glass Hammer is profiling successful women in the derivatives industry.
