Source: Wholesale Market Brokers Association
The Wholesale Market Brokers Association (WMBA) representing the world's largest interdealer brokers, firmly rebuffs the statement recently reported in press coverage of the submission by the Federation of European Stock Exchanges that "unregulated over the counter (OTC) markets were at the core of the recent crisis" and that OTC markets are unregulated.
It has been widely accepted that the crisis is a result of several seismic economic and financial forces. The epicentre of this was the transformation of bank lending through securitisation into highly complex credit products, that originators, rating agencies, buyers, and sellers of protection found difficult to value correctly, find liquidity for, or to hedge.
The perception that OTC markets are unregulated is also incorrect. The primary regulatory focus in OTC markets is on the participants themselves based on their activity, the nature of their counterparties and type of assets involved. It is misleading to suggest that the exchange traded markets have a more robust regulatory model. Instances of market failure can also be found in the exchange traded model therefore implying that it is the individuals or organisations that should be the focus of supervision as is the case in the OTC markets.
The WMBA believes that there is a danger that policy decisions are being considered that may attempt to force OTC products onto exchanges, resulting in a dramatic reduction in liquidity and product flexibility in markets essential for trading and hedging. Moreover, the individually negotiated nature of OTC contracts means that they are a more appropriate means to hedge complex or non-standardised risks. It should be noted that many billions of Euro of OTC trades are already centrally cleared on a daily basis and there should be no confusion between access to clearing and the utilisation of exchange platforms for execution.
The WMBA strongly supports the move towards a central counterparty (CCP) as the most effective step that can be taken to improve the settlement of credit default swaps and other OTC products generally. It acknowledges that regulatory changes will be a response to the crisis, but underlines that the focus should be on the regulation of market participants and not the mandating of monopolies in the execution of financial products. The OTC modee of execution of transactions is fully compatible with the well-publicised industry-wide benefit of reduced counterparty exposure for market participants. The WMBA continues to endorse completely industry steps toward these CCPs becoming operational.
The WMBA affirms comments made by the Futures and Options Association (FOA) on this issue and will be meeting with the EU to discuss these matters further in March.