OTC products: there is no silver bullet

An attempt to push clearing of all standardised OTC derivatives through regulated central counterparties is naturally going to draw a lot of criticism.

The Wholesale Market Brokers Association (WMBA) expressed its disappointment that the US Treasury did not take into account the reality that most of the severe losses suffered by banks in the recent crisis occurred in the structured credit markets and not in the over-the-counter credit default swaps market.

In a statement it said that it is also concerned that some policymakers do not seem to acknowledge that making markets more secure can be achieved through the clearing of products through recognised central counterparties (CCPs). In this way, CCPs would clear both for OTC and exchange-traded products alike. The implication being drawn by some market participants and commentators is that the only way to achieve regulators' ambitions is to coerce OTC products onto exchanges, it said.

David Clark, chairman of the WMBA, said: "The WMBA wishes to warn again that forcing OTC products onto exchanges would significantly reduce liquidity in financial markets, resulting in increased risks and costs for end users as their ability to hedge their exposures would be handicapped."

"Such users include governments, municipalities, corporates, and banks and other financial institutions on a global basis. While the objective of making markets more secure is supported by all market participants, and certainly WMBA members, the unintended consequences of poorly thought through policy decisions would have a serious impact on the real economy."

The WMBA said European initiatives have a firmer grasp of the essential role of the clearing house, and understanding of the transparency and post-trade security inherent in the activities of banks, and WMBA members use platforms that are Mifid-compliant in an already regulated environment.

A prime example is Icap's willingness to participate in a consortium to acquire Anglo-French clearing house LCH.Clearnet.

Off the back of US Treasury secretary Timothy Geithner's proposal to move more products on exchange, the share price of CME Group, which runs the CME Clearing House, surged. Ironically, it was within a week of the CME Globex platform suffering a technological outage affecting forwards curves - and acting as a reminder of the risks posed by monopoly market structures.