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Leaders from the World Federation of Exchanges (WFE) expressed concern about continued high risk in today’s the over-the-counter (OTC) derivatives market, and costs to the banking sector necessary to bridge an estimated $2 trillion shortfall for current market exposure.
Reform of the OTC derivatives markets has been a WFE priority as they have been seen as a central cause and accelerator of the 2008 crisis that brought down financial institutions.
The report, “The Global Risk Transfer Market: Developments in OTC and Exchange-Traded Derivatives,” is the work of the TABB Group, a financial markets research and advisory firm. The study was commissioned by the WFE to provide a detailed and unprecedented comparative analysis of OTC and exchange-traded derivative markets with a focus on market size, trade costs and the anticipated impacts of current regulatory reforms.
Restoring the integrity of derivative markets was a key priority for the WFE Chairmanship of William J. Brodsky. Brodsky, Chairman of the Chicago Board Options Exchange (CBOE), said: “The WFE and its members have been highlighting the risks of unregulated OTC derivatives markets since well before the 2008 financial crisis brought them into sharp focus. As a persistent advocate for globally-coordinated regulatory reform, WFE commissioned this study to establish a benchmark on how much has been done and still needs to be done to mitigate the risk of OTC derivatives.”
The G20 governments and regulators have recommended that central clearing, a key component of regulated exchanges, be adopted by OTC markets to reduce systemic risk. This study also reports that the shift to centrally-cleared markets will bring significant transaction cost savings. The TABB Group’s estimate is that high notional and high turnover OTC derivatives products have the greatest potential to approach exchange-traded derivative pricing, or up to 89% cost savings.
While regulators around the world have been approving measures that go in this direction, many of those actions have not yet been implemented, and in some cases are being resisted. As a result, WFE asked TABB Group for an in-depth report on the current situation.
As much as 90% of the OTC market could be cleared through the regulated markets’ clearing houses, according to TABB Group.
WFE, which provided data from its comprehensive statistical database for the TABB Group’s study, is committed to constructive information-sharing and collaboration with policy-makers and regulators to ensure that these reforms are coordinated globally.
The new WFE Chairman, Ronald Arculli, the Chairman of HKEx, said: "The WFE will continue to press for the much-needed reforms in the OTC derivatives market which the G20 governments have set an achievable timetable for central clearing in 2012. We look forward to further progress, and we will be examining results through our meetings and conferences in 2011."
