As major shifts are occurring in the derivatives industry, the economic framework developed in this article shows that those financial institutions that can develop the necessary structure to provide integrated solutions through its many business lines will have a competitive advantage. As the derivatives market is becoming commoditized and margins are running thin, a more customer-focused integrated approach to providing derivatives would allow a bank more access to those opportunities for structured customized packages where margins are high.
We will analyze the derivatives industry using modern concepts of strategy and industrial structure, focusing on five economic competitive forces with a discussion of the competitive forces of some major players. This economic framework will help us better analyze the economic structure of the industry and better describe the important changes that are happening. An understanding of the industry structure would allow derivatives players make more informed decisions about product positioning, cost positioning, and many other strategic business choices.
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