Tim Dodd
head of product management
SunGard’s Front Arena
business
In part one of this post on the OTC marketplace I took a look at some of the pressures leading to counterparty clearing including a bill in congress about exchange trading.
What people are beginning to see is that there is worldwide political pressure for strengthening oversight of financial markets to avoid the banking catastrophe we have seen in the last two years. This has manifested itself in a push for stronger overarching powers for financial regulators, further transparency of the entire OTC market place and a strong drive towards more centrally cleared business.
The push for centralized clearing cannot be ignored since political momentum is behind the change to more central clearing for all OTC products. In May 2009, Timothy Giethner, Secretary of the US Treasury wrote this to congress: “Market efficiency and price transparency should be improved in derivatives markets by requiring the clearing of standardized contracts through regulated CCPs… and by moving the standardized part of these markets onto regulated exchanges… and by requiring development of a system for timely reporting of trades and prompt dissemination of prices…”
The extra transparency should certianly motivate all politicians towards more central clearing. A number of central counterparties are expected to appear in the new competitive environment but only a few will come to dominate based on developments in CDS clearing. In the CDS market, regulators have pushed and many clearing houses are attempting to establish a niche in the market. None offer fungible services: some use SPAN margining, some a VaR based margin approach with stress scenarios, some clear index and single names whilst others offer just index clearing.
Expect to see centralized reporting come of age for the entire market. One or several institutions may be given the mandate for this. I do not expect a single institution to dominate as there is systemic and political risk in that. Although risks are smaller, there will resistance to a single organization having dominance for reporting the entire world OTC market (something 15-20 times larger than the credit market).
With all this emphasis on collateralization, centralized clearing, reporting and continued strong volumes we see costs of maintenance of outstanding positions increasing. How do you plan on managing those costs? Share your perspective on the OTC marketplace.