The impending regulatory overhaul of the OTC equity derivatives markets will require a rapid change in direction from an industry which has so far remained wedded to voice broking. The necessary upsurge in technology will deliver unprecedented innovation in trading and processing workflows as a result.
The ability for the buy-side to harness any available liquidity across the widest spectrum of instruments will require being able to locate the right sell-side desk across under resourced silo’ed banks, while delivering “best execution” in order to meet the growing number of regulatory reporting requirements. Technology will be the crucial enabler in this process.
The past few years have been challenging for the global economy but it seems as though the derivatives industry sustained more than its share of insults and injuries over the past year or so. Still reeling from the trauma of MF Global in October of 2011, exchange-traded volume went into its first nosedive in decades. Urgent regulatory requirements added intense cost and time pressures to company staffs that were already stretched. A non-clearing FCM, Peregrine Financial, collapsed in scandal. OTC derivatives struggled with complex regulatory mandates and weak volume. Perhaps the only positive for the year was that mergers and acquisitions at both the macro and micro level imply that innovation and creativity are still powerful industry drivers. That in turn suggests that the creative dynamism that has characterized the derivatives industry for so many years still has some innings to go.
In a letter to the FSB and other policy organizations, WFE encouraged global standard setting bodies to demonstrate continued support for the G20 commitments to bring greater transparency and central clearing to derivative markets by ensuring that the costs of ETD markets are not unnecessarily increased.
Leaders from the WFE have re-emphasized their support of regulatory action in the global derivatives market on the occasion of the publication of a new study commissioned by the WFE to examine the state of over-the-counter (OTC) and exchange-traded derivatives. The report describes how regulatory reform is resulting in significant shifts in product selection across the global risk transfer market.
This article looks at the need for corporations, insurance companies, hedge funds and other users of OTC derivatives to post collateral for their trades under Dodd-Frank. The article discusses the reality of Basel III’s impact on bank balance sheets and that in the end, costs will rise for endclients regardless of whether collateral is posted or not. The article concludes with recommendations for end-clients to assess their exposure now and to identify alternative financing options such as collateral conversion trades.
Keynote address by Dr. Subir Gokarn, Deputy Governor, Reserve Bank of India at the International Options Market Association, World Federation of Exchanges Annual Conference organised by the National Stock Exchange at Mumbai on May 4, 2011
The business of financial intermediation – bringing capital to new endeavours, securing a well-regulated set of investment choices for savers, and enabling risks to be laid off or assumed – has been one of the world’s great growth industries. Regulated securities and futures’ exchanges have stood at the apex of the burgeoning business of financial intermediation. Were we not so used to it, we would be startled that a single type of business could be so prominent that its street address would serve as short-hand for the entire economy, and an index of its prices a key barometer of economic outlook. Wall Street, Threadneedle Street, Hang Sen, Sensex, CAC40: these and other such names have become accepted barometers for economic wellbeing or otherwise.
As US and European policymakers push ahead to complete drafting new rules to govern global securities market, the need for transparency and risk mitigation in global over-the-counter derivatives markets remains a critical focus. Although much of their initial focus was on requiring OTC derivative trades to be cleared through a central counterparty (CCP), policymakers and regulators are now examining other steps that are equally critical to helping mitigate risk, enhance transparency and ensure that regulators have access to crucial market data. One of the most effective proposals under consideration is to require the reporting of all OTC derivatives trades to a central repository where all underlying position data (and possibly transaction data) can be held, with unfettered access provided to all regulators globally. This paper explores the value of such a premise—particularly in terms of the powerful tool that a global repository provides for regulators—as well as the severe data fragmentation problems that are likely to hinder effective regulation if the result of policy decisions on both sides of the Atlantic is a reporting system that is not unified.
The 2008 financial crisis post mortems agree that growth of the OTC markets and the increased complexity of new instruments outstripped the industry’s capacity to manage them. Weaknesses in the OTC markets became evident all too rapidly during the crisis as the value of assets traded became difficult to assess, banks lost confidence in each other, and illiquidity spread.
With the passage of legislation in the United States to transform Over-the-Counter (OTC) derivatives market, and similar measures in the works in Europe, the leaders of exchange industry sought the most up-to-date information on one of largest and most opaque parts of modern finance.
Reform of these non-regulated markets and products has been a priority for the G20 governments and regulators. They have been seen as a central cause and accelerator of the crisis that brought down financial institutions.
The global derivatives market is a main pillar of the international financial system and economy. As an indispensable tool for risk management and investment purposes, derivatives are used by more than 94 percent of the world’s largest companies.1) They contribute to improving operational, information, price, valuation and allocation efficiency, thus substantially increasing the efficiency of financial and commodity markets.2)
Derivatives help lower the cost of capital and enable firms to effectively invest and channel their resources. These factors are an important driver of economic growth.3) Europe – as the most important region in the global derivatives market – stands to benefit immensely from the positive impact of derivatives.4)
Derivatives are traded in one of two ways: either over-the-counter or on regulated markets, i.e. on exchanges. Exchange-traded derivatives are fully standardized whereas most OTC derivatives are customized contracts between two trading parties.
The OTC segment accounts for 90 percent of the market in terms of notional amount outstanding.
Here, the market volume is split equally between bilateral trading among market participants and multilateral trading, i.e. trading across a number of different market participants on organized marketplaces) such as interdealer-brokers or electronic crossing networks.
The financial crisis brought over-the-counter (OTC) derivatives to the forefront of regulatory attention. The default of Lehman Brothers, the near collapse of Bear Stearns and the bailout of AIG highlighted to all involved the significant role played by OTC products. Since then, regulators on both sides of the Atlantic have begun to look at how the derivatives market, or “weapons of mass destruction” as they have fashionably come to be known, can made safer. Although derivatives have been around for centuries, from the most basic contracts for the transfer of risk, the innovation within the sector has been fast and finding a solution to producing effective regulation from a policy-making point of view has not been easy.
William Brodsky, Chairman and CEO of the CBOE and Chairman of the WFE, shares his views on OTC derivatives in the Financial Times’ "Trading Room"
Derivatives provide a tool for investors to implement strategies for managing counterparty, market and liquidity risk. Order matching, i.e. the transfer of investors’ trading intentions into actual trades, price discovery and centralized clearing are at the heart of the production function of derivative markets. They thereby play a key role in market-based economies.
Interview with Bermuda SE CEO
WFE letter to FSB
The new global risk transfer market: transformation and the status quo
Highlights from the 52nd WFE General Assembly in Taipei
The World Exchanges unite for the 52nd General Assembly and Annual Meeting
Paris (26 September 2012) –Leaders from the World Federation of Exchanges (WFE) have re-emphasized their support of regulatory action in the global derivatives market on the occasion of the publication of a new study commissioned by the WFE to examine the state of over-the-counter (OTC) and exchange-traded derivatives. The report describes how regulatory reform is resulting in significant shifts in product selection across the global risk transfer market.
PARIS (12 April, 2012) – Global leaders of derivatives exchanges and clearing houses will assemble 16-17 April for the 29th IOMA Conference, the annual derivatives Conference hosted by the World Federation of Exchanges (WFE), to focus on the commercial and technological developments impacting derivatives markets. The conference also introduces the full annual IOMA survey on derivatives market statistics. The preliminary findings released on March 1, highlighted that 25 billion derivative contracts were traded on exchanges worldwide in 2011 - an increase from the 22 billion traded in 2010. Between 2006 and 2011, the number of derivative contracts traded on exchange has more than doubled. While last year’s growth rate (+12%) remains high, it is lower than the one observed in 2010 (+25%).
Paris (July 21, 2011) – The World Federation of Exchanges (WFE) today released the half-year trading figures for regulated markets worldwide. Strong growth was registered in the market capitalization of stock exchanges, a measure of the total value of listed companies. Exchange-traded futures and options registered higher volumes in most asset classes. The complete report may be viewed here:
PARIS (March 7, 2011) – Trading in derivatives contracts on regulated exchanges worldwide surged to the highest levels in nearly a decade in 2010, according to statistics compiled by the World Federation of Exchanges (WFE). More than 22.4 billion derivative contracts were traded on exchanges worldwide in 2010 (11.2 billion futures and 11.1 billion options) against 17.8 billion in 2009.
The report, “The Global Risk Transfer Market: Developments in OTC and Exchange-Traded Derivatives,” is the work of the TABB Group, a financial markets research and advisory firm. The study was commissioned by the WFE to provide a detailed and unprecedented comparative analysis of OTC and exchange-traded derivative markets with a focus on market size, trade costs and the anticipated impacts of current regulatory reforms.
Paris (6 December 2010) –Leaders from the World Federation of Exchanges (WFE) expressed concern about continued high risk in today’s the over-the-counter (OTC) derivatives market, and costs to the banking sector necessary to bridge an estimate $2 trillion shortfall for current market exposure.
Madrid (February 1, 2010) – The officers and members of the Board of Directors of the World Federation of Exchanges (WFE) today announced priorities for the year in which WFE celebrates its 50th anniversary. The WFE brings the world’s regulated exchanges together in order to improve the quality of markets.
The Committee on Payment and Settlement Systems (CPSS) and the Technical Committee of the International Organization of Securities Commissions (IOSCO) have published their final report on the OTC derivatives data that should be collected, stored and disseminated by trade repositories (TRs).
The Committee on Payment and Settlement Systems and the Technical Committee of IOSCO have today released for comment a report on the OTC derivatives data that should be collected, stored and disseminated by trade repositories (TRs).
The committees support the view that TRs, by collecting such data centrally, would provide the authorities and the public with better and timely information. This would make markets more transparent, help to prevent market abuse, and promote financial stability.
WFE Annual Meeting, Paris 2010 - Panel 2 Exchanges, clearers and OTC derivatives summary
WFE Annual Meeting, Paris 2010 - Panel 1 Exchange Strategy
Short preview of the WFE 50th Anniversary