Wholesale Market Brokers Association Defends OTC Derivatives Against WFE's Statement

The Wholesale Market Brokers Association (WMBA) rebuffed a statement by the World Federation of Stock Exchanges that blamed over-the-counter derivatives markets (OTC) for the recent financial crisis. The statement reported in press coverage said that “unregulated (OTC) markets were at the core of the recent crisis and that OTC markets are unregulated,” according to the WMBA.

The WMBA, representing the world’s largest interdealer brokers contends the crisis is the result of “several seismic economic and financial forces.” WMBA attributes the crisis to the transformation of bank lending into highly complex credit products, that originators, rating agencies, buyers, and sellers of protection found difficult to value correctly, find liquidity for, or to hedge, according to WMBA’s statement.

Refuting the perception that the OTC derivatives markets are unregulated, WMBA said the primary regulatory focus in OTC markets is on the participants themselves based on their activity, the nature of counterparties and types of assets involved. According to WMBA, it is misleading to suggest that exchange traded markets have a more robust regulatory model. There are still instances of failure in the exchange- traded model, it points out, implying that individuals or organizations should be the focus of supervision.

Instead, there is a danger that policy decisions are being made that could force OTC products onto exchanges, resulting in a dramatic reduction in liquidity and flexibility in markets essential for trading and hedging. WMBA contends that OTC markets are more appropriate for hedging non-standardized risks. It pointed out that billions of Euros of OTC trades are currently centrally cleared on a daily basis, adding there should be no confusion

However, WMBA supports the move towards a central counterparty (CCP) as an effective step to improve the settlement of credit default swaps and other OTC products generally. Acknowledging that there will be regulatory changes as a response to the crisis, WMBA insists the focus should be on” regulation of participants and not on mandating of monopolies in the execution of financial products.”

Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio