Derivatives Users Already Benefiting From Upcoming Rules, Says Exchange Group

Terry Flanagan

Many exchanges, the likely winners from the unprecedented wave of rules that are set to descend on global derivatives markets, believe that some market participants are already benefiting from the upcoming regulatory changes to market structure.

The World Federation of Exchanges (WFE), a Paris-based group that lobbies on behalf of bourses and counts NYSE Euronext, Deutsche Börse, BM&FBovespa and Hong Kong Exchanges & Clearing among its members, has reaffirmed its support for the looming regulatory changes in derivatives, which are being introduced to add transparency and reduce risk by shedding light on the previously opaque $700 trillion market. U.S. investment bank Lehman Brothers was a big user of derivatives and its demise in 2008 caused the onset of the global financial crisis.

“The paradigm shift clearly present in trading OTC and exchange-traded derivatives is reflective of the pending legislation in both Europe and the United States, and we see that market participants are moving to exchange traded derivatives and central clearing even before it is mandated as they see the benefit,” said Jorge Alegria, chairman of WFE’s derivatives chapter, IOMA, and also chief executive of the Mexican Derivatives Exchange.

“Clearing derivatives has become more of a necessity in light of these potential changes.”

The European Commission estimates that 95% of all derivatives trades are conducted OTC, with the rest traded on exchange-like venues. But the new rules, in the shape of Dodd-Frank in the U.S. and Emir in Europe, which are likely to fully come into effect from early 2013, will see most standardized derivatives contracts forced on to exchange-like venues and through centralized clearing to reduce systemic risk. More exotic derivatives products, unsuitable for exchange trading, will remain OTC but will be subject to higher margin requirements.

Exchanges are thus likely to see more business moved on to their venues. However, other market participants are not so sure that the upcoming changes to the derivatives landscape will be that easy to implement.

“In the equities world, the OTC and exchange-traded market existed as one since equities were first traded whereas up to now the OTC and exchange-traded derivatives world has gone on parallel but very separate paths¬—but now they are coming into a crossroads and no-one knows whether it’s going to be a train wreck or not,” Steve Grob, director of group strategy at Fidessa, a trading and technology company, told Markets Media.

“There is a little bit of a self-congratulatory style in some exchange leaders as if they have the moral and social high ground over the OTC world. And they probably have. But is that a good thing? I’m not sure. The reason OTC markets exist in equities/derivatives or anything else for that matter is generally for fairly good reason.

“To politicize it and start making sweeping judgements about it and that it should be on one platform and that there is some sort of moral high ground over how things should be traded is probably a mistake.”

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