The over-the-counter (OTC) derivative market is worth an estimated $708 trillion, and regulatory requirements are changing its fundamental structure. Amid an evolving architecture, can market players achieve meaningful differentiation?

Background

In September 2009, G20 leaders agreed that standardised OTC derivatives will be traded on exchanges, Swap Execution Facilities (SEFs) or Organised Trading Facilities (OTFs), processed through clearing houses (CCPs) and reported to repositories. However, market players are still concerned about liquidity and flexibility in the new marketplace.

Concerns

Concerns about the new regulatory requirements surrounding OTC derivatives include:

  • Lack of minimum requirements of standardisation and liquidity for contracts available for trading.
  • Pre-trade transparency, resulting from having all executed trades known, may actually decrease liquidity as participants are reluctant to show their position.
  • A proposed rule, requiring a participant to send a request to at least five participants, could inhibit dealers from aggressive pricing, knowing the deal is known to others.
  • A proposal to base SEFs on an Order Book or Request for Quote (RFQ) trading model, which many participants believe is overly restrictive.

In addition to fears about lower liquidity and flexibility, market players are bracing themselves for major technological, operational and strategic challenges. In particular, the move to an electronic marketplace, real-time pricing and transaction reporting—and associated requirements for interoperability—will pose a significant challenge for many.

Opportunities

Amid the challenges and debate, players must not lose sight of the larger opportunities to create a competitive advantage in the new regulatory landscape. Tune in next week for some of the opportunities that Accenture sees in the OTC derivatives market.

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