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Iosco supportive of switch from OTC to exchange-based trading

18 February 2011  |  10190 views  |  1 Stock broker in front of Stock exchange screen

Moves to force trading in derivatives away from over-the-counter markets to exchange and electronic platforms will be broadly beneficial in increasing competition, transparency and risk oversight, according to a report prepared by international regulatory overview body Iosco

The study by the Technical Committee of the International Organisation of Securities Commissions analyses the benefits, costs, and challenges associated with a switch from opaque trading to more transparent exchange-based trading.

As of December 2009, approximately 89% of derivatives contracts were transacted over-the-counter (OTC). While the number of derivatives contracts that are traded on organised platforms has grown throughout 2009 and 2010,the OTC portion of the market continues to dominate.

Iosco suggests that a transition away from OTC markets need not impinge on liquidity, so long as regulators are flexible in their definitions of what constitutes an organised platform and take a co-ordinated approach.

Hans Hoogervorst, chairman of Iosco's Technical Committee, says: "While there is debate amongst regulators regarding the characteristics that an entity should exhibit to qualify as an eligible organised platform, the overriding principle that regulators must observe is that they need to coordinate their efforts in facilitating the transition of OTC derivatives trading to organised platform trading to ensure that the objectives of the G-20 are achieved, and not undermined."

Iosco list seven key characteristics that such organised platforms must encompass, including registration with a competent regulatory authority, fair access, pre- and post-trade transparency arrangements, operational efficiency and resilience, active market surveillance capabilities, transparent rules and cross-platform interaction.

However, regulators in the US and Europe are split on an eighth condition that would require platforms to seek liquidity elsewhere and trade with multiple liquidity providers rather than relying on just one, such as a bank.

Read the full report:» Download the document now 544.5 kb (PDF File)

Comments: (1)

A Finextra member
A Finextra member | 18 February, 2011, 12:47

Its really important that OTC is not treated as any exchange traded product. There is enough technology available in the market to acheive the aims of regulators without restricting OTC. XML based or XBRL would be the obvious but why not make OTC reported on over the web and allow any investor or regulators to view the details?

I am sure going down an Exchange route will simply not work and drive this business underground

I do hope regulators use their imagination and do not create anything at odds with the market. That would be plain stupid  

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