Shaping the Future of Global Derivatives Markets through International Cooperation
Wednesday, March 21, 2012 By
Ganesh Iyer, Senior Product Marketing Manager
In 1967, the American psychologist Stanley Milgram conducted an experiment to determine how many acquaintances it would take to pass a letter between two randomly selected people. He concluded that it took six steps or fewer to connect any two people in the world and coined the term ‘six degrees of separation’. Rapid technological progress and the advent of social networks have further reduced the number of hops required to connect different people and organizations around the globe.
What does interconnectivity have to do with over-the counter (OTC) derivatives? Everything! The complex and interconnected nature of the global derivatives markets lead to a ‘butterfly effect’ where actions in one market can have severe and serious repercussions in a market on the opposite side of the world. In addition, the opacity of the OTC derivatives markets, where there is little to no visibility of counterparty risk, also amplifies the butterfly effect and creates massive risk management problems. While the majority of the world’s OTC derivatives trading occurs in the United States and Europe, many of the same products are traded in multiple jurisdictions by transnational institutions. Given that these markets function on a cross-border basis, it is important that there is international cooperation and coordination to fulfill enforcement and supervision responsibilities, lower systemic and operational risk and minimize the potential for regulatory arbitrage. That is where I think Singapore and Hong Kong, two of the largest financial centers in the world’s fastest growing region, can and are playing a pivotal role.
A few weeks ago, we partnered with Asia Etrading and put together panels of industry experts in both cities to discuss the global OTC derivatives landscape and analyze the impact of key proposals of policymakers: standardizing derivative products, clearing contracts centrally and reporting to trade repositories. The timing was perfect and the events drew hundreds of attendees as the regulatory bodies in Hong Kong and Singapore had only recently released consultation papers on overhauling their OTC derivatives markets.
Panelists agreed that while the proposals in the two Asian financial capitals largely mirrored those of the G20, they also took local market factors into consideration in order to reduce systemic risk and create stable, transparent markets. It is also anticipated that various market participants including derivative execution venues, dealers, central counterparties and trade repositories will need to connect to each other, leading to a boom in demand for networking and communications solutions. We all know that derivatives provide efficiency to the capital markets by facilitating hedging and creating price discovery. International cooperation in supervising and regulating derivatives will ensure that we can now safely and effectively trade these contracts.
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Authors
- 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
- David Anderson, RTTRT Program Director, FISD
- E. Paul Rowady, Jr., Senior Analyst, TABB Group
- Tim Carmody, VP, Global Network Engineering
- Matthew O'Donnell, Director, Product Management
- Joe Esposito, Director, R&D Services
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