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The Global Risk Transfer Market: Developments in OTC and Exchange-Traded Derivatives (WFE Study November 2010, conducte

The Global Risk Transfer Market: Developments in OTC and Exchange-Traded Derivatives (WFE Study November 2010, conducted by TABB) IOMA/IOCA 2 May 2011 Mumbai. Marcus Zickwolff Eurex Group. Purpose of the WFE study. The study should review three questions:

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The Global Risk Transfer Market: Developments in OTC and Exchange-Traded Derivatives (WFE Study November 2010, conducte

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  1. The Global Risk Transfer Market: Developments in OTC and Exchange-Traded Derivatives (WFE Study November 2010, conducted by TABB) IOMA/IOCA 2 May 2011 Mumbai Marcus Zickwolff Eurex Group

  2. Purpose of the WFE study • The study should review three questions: • What is the size of the OTC derivative markets • The impact of regulation on OTC derivatives • Estimated cost analysis • Study conducted by the Tabb Group, • Preliminary findings were presented at the WFE General Assembly 11/10/10 • Final report was published in November 2010 • Interviews with 28 market participants • Dealers • Buy-side • Hedge funds • Corporate end users • Exchanges & clearinghouses • Interdealer brokers • Data providers

  3. OTC Derivatives markets dwarf cash & exchange traded derivatives in outstandings OTC, EDT, and Cash Market Comparison Notional Value Outstanding / Open Interest

  4. However, when viewed by notional turnover the picture changes Exchange-Traded Derivatives Nominal Turnover Over-the-Counter Derivatives Nominal Turnover

  5. OTCD mostly in Europe – while ETD more concentrated in US. APAC may speed ETD growth 64% 61% 8% 57% 48%

  6. OTCD market has shifted away from the dealers

  7. Collateral leading concern of OTCD firms; collateralized trades increased 240% since ’03 75% 49% CAGR 13.2% Source: ISDA, TABB Group

  8. OTCD reform primary focus in the US: reducing systemic risk and increasing overall market transparency Focus High Level Concerns • Regulators determine eligibility • Hedge exemption may create loopholes Clearing All Eligible Products must be cleared; Endusers exempt • Unclear if matching utilities can register as SEF • Trading requirement doesn’t apply if no • SEF or BOT offers trading Cleared contracts mustbe traded on a BOT orSEF Trading • Dual registration with SEC & CFTC w/be Operational nightmare • Key terms are still undefined Dealers & Mgr SwapParticipants must register. Capital will be more tightly regulated Registration All OTCD must be reported to a traderepository • Unclear how regulators will monitor systemic risk • Multiple repositories & clearinghouses limit transparency Reporting Source: TABB Group

  9. The greater the volume traded, the lower the transaction cost Volume Increase = 5x Cost Reduction Source: ICAP

  10. Talks w/28 market participants showed some commonality, but conflicting biz models & views ◐ ◕ ◐ ◕ ◕ ◕ ◕ ◕ Increase Decrease Same Positive Negative Indifferent

  11. Conclusions • The OTCD market will remain somewhat stagnant until new rules are finalized. • European regulators likely to take a similar approach to US regulators • US regulations to be enacted by fall ‘11; however 6-12 impl. delay expected • Exchanges have opportunity in nearly every aspect of the OTCD market, • However don’t assume these products will fit nicely into their existing models • Dealers & buy-side looking to re-craft business models for the new world. • Opportunity exists at nearly every level of the OTCD lifecycle. • Larger dealers looking to compete across all facets • Facilitation, Trading, Clearing, Prime brokerage, reporting & analytics • Early focus of the market is in interest rate and credit swaps. • IRS is largest market and presents largest opportunity • CDS remains from an early push by regulators to reduce systematic risk

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