Whither OTC Markets after the Crisis? Implications for Tech Vendors

Introduction

As a result of the global financial crisis governments and regulators demand greater transparency in OTC markets through central clearing and even trading on exchanges. Ovum considers the implications for suppliers of technology.

Scope

*Capital markets

*Non-exchange-traded assets

Highlights

The markets in instruments traded over the counter (OTC) rather than on exchanges are undergoing major changes, as regulators and legislators seek to promote increased transparency in the wake of a global financial crisis which they attribute to these same products.

Reasons to Purchase

*Gain an insight into how regulators are looking to drive more transparency in OTC markets.

*See what are the technology challenges faced if more OTC instruments are to be centrally cleared.


Report Highlights

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SUMMARY 1
Catalyst 1
Ovum view 1
Key messages 2
Asset-backed securities are seen as the source of the latest crisis 2
Regulatory efforts now extend beyond collateralized debt obligations 2
Sponsored access is also in the authorities' line of fire 2
OTC derivatives clearing attracts incumbent clearers and new entrants 2
CCP interoperability will become even more important 2
The essence of clearing is risk management 2
For market participants, better reporting capabilities will be essential 2
TABLE OF CONTENTS 3
MARKET ConTEXT: The crisis sparks calls for transparency in otc markets 4
Asset-backed securities are seen as the source of the latest crisis 4
business Focus: regulators want clearing for multiple derivative types 5
Regulatory efforts now extend beyond CDOs 5
Sponsored access is also in the authorities' line of fire 7
Final legislation is still some way off 8
The role of CCPs is to reduce risk 8
Some OTC instruments already undergo clearing 8
CDS clearing is underway 8
OTC derivatives clearing attracts incumbent clearers and new entrants 9
CCP interoperability will become even more important 10
Technology FOCUS: better risk management will be a requirement 13
The essence of clearing is risk management 13
For market participants, better reporting capabilities will be essential 14
RECOMMENDATIONS 14
Recommendations for enterprises 14
Consider third party software 15
Look at SaaS 15
Recommendations for vendors 15
Connectivity vendors should pitch higher bandwidths 15
Systems vendors should focus on scalability and automation 15
Risk management vendors have opportunities across the board 16
Alternative views 16
APPENDIX 17
Ask the analyst 17
Definitions 17
ABS 17
CCP 17
CDO 17
CDS 18
Central securities depository 18
CFTC 18
Code of Conduct for Clearing and Settlement 18
Dark pools 19
Derivative 19
Exchange-traded 19
FX 20
FX Spot• 20
FX Forwards• 20
FX Futures• 20
FX Swaps• 20
FX Options• 20
IRS 20
Liquidity 21
Novation 21
OTC 21
Further reading 21
Disclaimer 22
List of Figures
Figure 1: How a CDS works 6
Figure 2: How an IRS works 7
Figure 3: Market structure for clearing and settlement in the US and Europe 12

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