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 Brian Lynn
CTO, Global Electronic Markets
Omgeo CrossCheck technology expert
This month looks to be a significant one in terms of shaping the future financial markets infrastructure of both the US and Europe. On Wednesday, the US Department of Treasury is due to unveil its sweeping plan to overhaul financial regulation, while in the next couple of weeks, the EC is due to make clear its recommended approach to improving transparency of derivatives markets. Recent claims in the marketplace have suggested that the close timing of these announcements is more than just a coincidence, implying that there is far more global co-ordination of regulatory and supervisory efforts than we have previously been led to believe.
For example, in its forthcoming proposals, many expect the EC to recommend further moves to increase the transparency and efficiency of the OTC markets through advocating greater central clearing of OTC markets. A move which would echo the proposals made by the US Dept. of Treasury a few weeks back. Indeed, the support for such proposals from the sell-side has been equally unanimous on both sides of the Atlantic. However, one of the current issues around co-ordination of such initiatives for the OTC markets, in fact rests within the industry, between the buy-side and sell-side.
The collapse of Lehman has moved the mitigation of counterparty risk high up on the agenda of the buy-side, while the corollary of tough market conditions has given the buy-side an increased focus on creating greater efficiencies. As a result, the buy-side has an active interest in shaping the central clearing solutions currently being developed for the OTC markets. Moreover, to maximise its chances of success, any proposed central clearing structure must take into account these important buy-side considerations.
Recently, with these issues in mind, certain members of the buy-side have become increasingly vocal, for example, on their desired model for the central clearing of CDSs, therefore revealing a slight difference in opinion with the sell-side. Some of the former has publicly expressed support for a choice in central clearing solutions in the form of ICE and CME, while some sell-side firms favour a single-bank-owned model - ICE. This example is indicative of the wider trend in the marketplace that investors are now looking more closely at how the markets are working and want to take an active role in shaping their development, even if occasionally their views are at odds with those of the sell-side.
Over the past few months market participants have made it clear that any efforts to increase the transparency and efficiency of the OTC markets need to be co-ordinated globally and recent evidence would suggest that policymakers have heeded such advice. Perhaps it is now the market participants – buy-side and sell-side - that need to co-ordinate their efforts more closely to ensure a workable solution for all.
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