OTC Markets Open Up To Transparency

Terry Flanagan

Previously opaque segments of the derivatives market are becoming more transparent thanks to regulatory pressures and industry initiatives.

In particular, the emergence of centralized venues for trading over-the-counter swaps has heightened demand for market data needs to price exotic instruments.

One such initiative is from Cleartrade Exchange (CLTX), an electronic global marketplace for OTC commodity derivatives that is regulated by the Monetary Authority of Singapore (MAS). CLTX has launched Cleartrade Market Data Service (CMDS), which provides a combination of OTC swaps-related market data to be distributed by major data vendors to banks, trading organizations, broker firms and analysts.

“We’ve leveraged our investment as an exchange to produce quote vendor feeds as well as integrate with other market data vendors,” Bob Antell, director of business development at CLTX, told Markets Media.

The contents of the feed were influenced by feedback from members and the market in general. “It was clear the industry would greatly benefit from the addition of data from key market sources in addition to our proprietary exchange data,” said Antell.

Cleartrade provides a specialized order management and processing platform, developed for the freight and commodity derivatives markets.

Regulations like Dodd-Frank, MiFID and EMIR are expected to have a salutary impact on the percentage of freight and commodity contracts that are executed on platforms such as Cleartrade and that are centrally cleared.

“While swaps may contribute to systemic risk, the transparency that is afforded by moving swaps on to an exchange could have the function of decreasing systemic risk, since regulators have the ability to track them,” Louis Caron, executive lead at SAS RiskAdvisory, told Markets Media.

“Futures are regulated on exchanges by the CFTC [Commodity Futures Trading Commission], which means if someone takes a massive futures position, the phone starts ringing,” said Caron. “Meanwhile, the OTC market has remained opaque, and regulators have been trying to change that.”

Container freight swap agreements are a financial futures contract that allow for hedging and speculating against the volatility of intermodal seaborne container rates.

A container freight swap agreement most commonly takes the form of a cash-settled agreement between two parties with an equal and opposite opinion of the future of the market.

These agreements are currently available OTC with clearing at LCH.Clearnet and SGX AsiaClear against the Shanghai Containerized Freight Index (SCFI).

The addition of clearing, which provides risk management for OTC container freight swap trades, has been made in response to increased demand to manage freight price risk. “We have always seen the need to provide access and efficient clearing via the clearing houses that are relevant to the markets traded on our platform as a very important factor of our business,” said Antell at CLTX.

The initial CMDS content comprises the following data sources: CLTX core data (freight, ferrous metals, agricultural and energy prices from the CLTX regulated market), Freight Investor Services’ broker data (freight, iron ore, containers and fertilizers), the World Container Index, and China Steel Indices.

Once a distributor subscribes to the service, they will be able to access all four sources of data under a single license agreement. CMDS will enable its members and traders in general, who use charting and other analytical applications, to use the combination of data to create trading strategies.

“As a regulated exchange, we have to publish our own quote feed and by marketing it to big players like Bloomberg, Thomson Reuters and Interactive Data, we are looking to grow the channels through which this data can be accessed,” said Antell.

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