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WFE Focus April 2011
Inside a new market structure
Peter Clifford
Deputy Secretary General,

When major changes occur in markets, the new rules create opportunities not only for existing firms but for a wide range of newcomers. For example, the fragmenting forces in the equity markets are almost an industry in themselves creating new needs for technologies, trading techniques and business plans that could hardly have been envisioned before. Major change is coming to the over-the-counter markets in derivatives. What new services will be part of that movement?

In Focus this month, the issue of collateral comes under the microscope. Finadium has written in these pages before on issues concerning securities lending and borrowing, so it was of interest to see their take on the possible areas of development for the new rules in the OTC.

The WFE study on the OTC markets conducted by the Tabb Group last year highlighted the amount of collateral that would be needed to maintain the current market structure while managing risk better.

Since then, the issue of exemptions for non-financial end-users has been a major concern of the lobbies fighting change in the markets. This political battle has for now shifted the debate away from solutions for an OTC with less systemic risk.

But as Josh Galper and Jonathan Cooper point out, Basel III will still have an impact on the costs of OTC. They explain why the collateral conversion trade could have a bright future, and why CCPs (central counterparties) may be the least expensive, credit-neutral solution for hedging and investment needs.

Another important strand in the DNA of the new market structure is the development of the Asian exchange-traded derivatives and OTC markets. The WFE was fortunate to have the insights of SEBI and the Reserve Bank of India (RBI) during the recent derivatives conference in Mumbai, the IOMA Annual Conference.

In his address to IOMA, Dr. Subir Gokarn, Deputy Governor of the RBI, provided the framework for the development of both the exchange-traded and OTC markets. This vision is of a hub and spoke arrangement with exchange traded products used for the aggregated exposure of counterparties.



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