OTC Derivatives Reform (One of the mandates of the 2009 G20 summit was to ensure the electronic trading and central clearing of standardized OTC derivatives. OTC, or “over-the-counter,” is seen as the antonym to exchange-traded, or “listed,” assets in most literature. Now global regulators seem intent on removing OTC from the trading landscape.
Shifting bilateral OTC activity onto electronic platforms -- organized trading facilities (OTFs) in Europe and swap execution facilities (SEFs) in the U.S. -- is the way regulators plan to achieve this paradigm shift. It is expected that a final rule on SEFs will be published soon by the U.S. Commodity Futures Trading Commission (CFTC) to see electronic trading of standardized derivatives become a reality in the first half of 2013. Interestingly, though, the corresponding regulation in Europe is not part of EMIR; rather, it is part of the overhaul of the Markets in Financial Instruments Directive (MiFID II), which is not due to enter into force before 2015.
Despite regulators’ demand for new trading venues, there are also skeptical voices in the market, which discuss the death of SEFs before they have even started. In a recent TABB Group research report, TABB’s Adam Sussman points out that a staggering 29 firms have announced their intentions to become SEFs. But he sees designated contract markets (DCMs) as better positioned, as they can trade swaps next to a host of other instruments, whereas SEFs can only trade swaps.
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4 Comments to "OTC Clearing Part 7: If They Build It, Will They Come? ":
loren
25 October 2012
Good summary of the situation. With so much uncertainty in the market, I'm wondering who out there is thinking about the eventual consolidation or aggregation that you mentioned and who you might think is currently best suited to be in a position to play that role.
Comments (3)
triesack
29 October 2012
Hey loren, well, if I only had my crystal ball handy... :) I would believe that some incumbent market players will dominate that area, such as Bloomberg or Tradeweb. Interestingly enough, the CFTC seems to be inclined to allow voice trading even for such swaps that would need to be cleared (http://www.nasdaq.com/article/cftc-draft-seen-keeping-phone-trading-for-swaps-20121024-01653#.UImHLoYsE1L). So, it remains interesting to see how this really pans out.
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mtirinnanzi
02 November 2012
Hi Tom! Agree with Loren, good summary of the situation.
While the goverment is allowing voice trading, who on earth would want voice trading? Tell the Street your trade and you're guaranteed poor execution. Why would anyone buy swaps this way?
The central limit order book style (showing OTC bids/asks) offered by TERAEXCHANGE with a pre-trade credit check provides real time market prices and assures clearinghouse acceptance. Marti
Comments (3)
triesack
04 November 2012
Hey Marti, yes and no. There will still be need for rather non-disclosed trading. BUT, agreed, for most purposes it will be sensible for most participants to go through an open, lit market mechanism, be that a SEF, OTF, DCM or whatever... Best, Tom
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