Our annual take on where SIFMA, LIBORs, Treasury Yields, swap rates, and other market indices will head in the new year.

2012 Interest Rate Forecast – Cardea Partners

The global derivatives market could expand significantly this year, a report prepared by advisory firm TABB Group says.

The company’s study, which was commissioned by the World Federation of Exchanges, estimates that $700 trillion in derivatives could be traded by the end of the year. At year-end 2009, the derivatives market was worth $615 trillion; at the middle of 2010, it contracted slightly to $583 trillion, according to TABB.

But with volatility on the rise in the currency and commodity markets – and more companies using derivatives to hedge their risk exposure – the derivatives market could be poised for significant growth.

Indeed, the Wall Street Journal quoted TABB senior analyst Paul Rowady as saying, derivatives may be used “as a key component of a broader risk-transfer mechanism for global financial firms, corporations and investment managers.”

But, the research firm cautioned, the new regulations mandated by the Dodd-Frank financial reform bill could crimp derivatives trading significantly. TABB estimates that the bill could require market participants to post up to $2.2 trillion of collateral against their derivatives trades.

A common restructuring technique for existing interest rate swaps is the amend or blend and extend, where the present value of an exisitng trade is rolled into the rate of a new deal.  There can be a number of pitfalls to this strategy, and clients should be aware of all ramifications.  Click to see our monthly piece from August that speaks to this structure below:

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Cardea Partners – Interest Rate Swap Blend and Extend

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Give us a call to discuss further if your firm is involved in a swap restructure.