CURRENT SPOTLIGHT SERIES

Comments | Post a Comment

2 Comments to "BlackRock's Peter Fisher on OTC Derivatives Reform":

• 

  Anonymous

  02 February 2011

  This conversation is far from concluded, but as long as observers and stakeholders apply exchange traded market frameworks to OTC markets, we are not going to get there any time soon. There are fundamental differences between exchange and OTC markets. The most obvious is that exchange traded markets (generally) concentrate liquidity in a single venue (the exchange). This make such markets ripe for clearing because the clearing house gets a single venue for price discovery and a single venue to liquidate default positions. OTC markets don't work this way. There are multiple and fragmented pools of liquidity - by design. They form around voice brokers and banks. Thus, comments from Mr Fisher around how will dealers find liquidity are utterly confusing. They will find liquidity the same way they do now. They (either directly or through their broker) ring around the price makers (banks) and ask for a price. The market structure fundamental won't necessarily change, but the delivery mechanism will. Rather than use a phone, they will use a network. And with an electronic delivery mechanism, there are other advantages such as auditability and integrity (making it hard for dealers to hide trades). As is the case now, there will continue to be multiple pools of liquidity. Some of the SEC/CFTC proposals seek to link these pools to get greater pre-trade transparency and integrated price formation, but moving the current market structures electronic won't make transparency worse. Similarly, questions from the interviewer around whether OTC markets will fragment like cash equity markets are currently fragmenting seem odd. These markets are already fragmented - they were always fragmented. There is no single place one goes to get an X year IRS. Further, bringing hedge funds and algos into such markets requires clearing because of the documentation (ISDA) and credit constraints of current OTC markets. And not just clearing, but certain types of clearing models. For example, some OTC clearing houses still require that deals be bilateral first before being given up to a clearing house. With such a model, the documentation and credit issues remain. Thus whilst the market is cleared (with the systemic risk benefits therein), participation is still limited to the inter-bank network.

• 

  rimessage

  01 March 2011

  As we all know fundamental difference exists between exchange and OTC markets, all entities need to come together to work on building Market Framework that means Brokers, liIquity on exchanges, Pricing, Clearing House, delivery channels, trade transprancy, multiple sources of liquidity flow validation, currency exchange delivery optimization. These instruments will help to analyze risk level tolerance and maraket leverages.I agree bringing hedge funds ALGOS into such markets requires clearing of ISDA. I think FRAMEWORK and PROCESS is the market need, along with market responsive tools.

  Comments (8)