The New World of OTC Derivatives – A Complex Connectivity Landscape
Tuesday, October 16, 2012
Ganesh Iyer, Senior Product Marketing Manager
History is full of examples of crises triggered by unregulated derivatives trading, with the global financial crisis putting the spotlight on the serious inadequacies of the OTC derivatives market and the risks these contracts present to the broader economy. To mitigate this risk, regulatory initiatives, spearheaded by the G20, are now in place to change how they are traded and cleared.
The proposals of the European regulators largely mirror the G20 recommendations, which include increased standardisation of derivative contracts, a move to central clearing, reporting to trade repositories and higher capital requirements for non-centrally cleared contracts.
These changes will have significant impact on the connectivity requirements of the market’s key players, with a likely surge in demand for voice communications and electronic connectivity services as the different entities that play a role in the OTC derivative trade lifecycle (buy-side firms, swap dealers, major swap participants, derivative execution venues, central counterparties and trade repositories) will need to connect to one another. This will cause the connectivity landscape to become quite complex, with both liquidity venues such as organised trading facilities (OTFs) and dealers aggregating one another to provide a single view of the market for the buy-side. Aggregation will become a key driver of connectivity, given that this market is initially likely to see numerous dealers and liquidity venues. Another interesting ramification is that when executing trades on dealer-to-client platforms, buy-side firms would have the opportunity to connect directly to liquidity venues as well as go through their broker’s direct market access system.
In addition to this, there are two rules proposed by America’s Commodity Futures Trade Commission ("CFTC") that are likely to have a significant impact on the markets. The '15 second' rule (which allows two parties to prearrange an order over the phone, but requires the order to be displayed on the open market for 15 seconds before it can be closed by the parties) and '5 RFQ' rule (which requires all requests for quotes to be sent to at least five different liquidity providers) are designed to improve pre and post trade transparency, accelerating market fragmentation and leading to an explosive growth in market data. As more contracts become standardised and electronic trading venues proliferate, market participants will experience the need for reliable and secure data connectivity services.
The sheer number of players, the vast size of the market, the number of derivative asset classes being traded and variations in trading models result in an extremely complex connectivity landscape, as the vast global and interconnected OTC derivatives market that was formerly opaque is rapidly becoming more transparent. Global cooperation amongst policymakers and market participants is likely to enhance the benefits offered by OTC derivatives and create a stable, robust and safe environment to trade them.
This blog first appeared on Timizzer, a British digital network for finance, markets and business.
- Michael Speranza, SVP, Product Management and Marketing
- Kevin Acott, SVP, Managing Director, EMEA
- David Brown, SVP, Global Network Operations
- David Dodd, SVP, Managing Director, APAC
- Simon Jones, Senior Product Marketing Manager
- Ganesh Iyer, Senior Product Marketing Manager
- Jonathan Morton, VP Product Marketing
- Matthew Parker, Product Manager, Trading Systems
- Bart Bartolozzi, Senior Product Marketing Manager
- Brett Berkowitz, Senior Manager, Product Management
- Bob Williams, Research Director-Capital Markets Practice, CEB TowerGroup
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- E. Paul Rowady, Jr., Senior Analyst, TABB Group
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- Robert Simpson, Vice President, Global Financial Compliance, Verint
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