NEW YORK (TheStreet) --As banks and money managers gear up to comply with new derivatives rules stemming from Dodd-Frank and Basel 3, technology vendors are elbowing each other out of the way to capture a share of the new business.
"It's going to be a bonanza for these IT firms," says Sean Owens, director of fixed income at Woodbine Associates and author of a new report assessing nine different vendors in the new space.
The largest of the vendors is Sungard, owned by Silver Lake, Bain Capital Partners, The Blackstone Group (BX), Goldman Sachs (GS), Kohlberg Kravis Roberts & Co. (KKR), Providence Equity Partners and Texas Pacific Group.
Algorhythmics, a division of IBM (IBM), has a bigger foothold in the critical business of collateral management, however. As a result of new regulations, companies that trade derivatives will be required to post collateral to back their positions, which they must increase each day if their trade begins losing money. Initial estimates of the amount of new collateral that will be required to back derivatives trading under the new rules range from $800 billion to $2 trillion.While the need to adjust collateral daily is what will spur companies to upgrade their systems, Owens believes many will use the opportunity to "adopt a more comprehensive integration of risk, liquidity and collateral management," according to his report. In addition to the IT vendors, custody banks including Northern Trust (NTRS),State Street Corp. (BX) , BNY Mellon (BK)and JPMorgan Chase (JPM) will gain business from firms that want to outsource collateral management and related capabilities. Given the relative size of these institutions, however, Owens doesn't expect the added collateral management business will have a noticeable effect on earnings. Rather, it looks like collateral management will be relegated to sleepy backwater status at most firms--at least until something blows up. -- Written by Dan Freed in New York. Follow @dan_freed
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