Slow Jam

Despite the factor eight typhoon that hit the first day of SIBOS, there was a much more calm and thoughtful mood at this years event. Epitomising this reflective theme was the more practical tone being adopted by regulators on what can be achieved in the area of risk management. It would seem that the last year has taught policymakers what is achievable versus the grandiose structures originally envisaged.For example, from a practical perspective, there is no regulator globally that has the tools or expertise to compile and analyse a macro-risk management position for their whole market, nor indeed for every individual institution. Certainly if one takes the OTC markets, the central data repository currently being considered by the EC may provide supra-regional regulators with tools with which to view completed OTC transactions (a small proportion of the overall market). However, this wouldnt necessarily assist in the risk management monitoring of individual firms, which may have hedges to many underlying positions far too numerous for regulators to monitor. As such, it is highly likely that regulators will push hard for a number of initiatives to be undertaken within OTC trading; that trades should be either conducted on an exchange or on electronic platforms, cleared by a CCP and listed on a trade warehouse. The US and Europe seem closer in this area than in some others.The corollary of such initiatives will be that the gulf between exchange and OTC markets narrows leading to the development of a two tier market: exchange-traded and exchange-lite. Undoubtedly, it will mean that trading OTC will become a much more expensive affair as regulators slap higher capital charges on OTC transactions that cannot be centrally cleared, and perhaps this will lead to a new way of describing transactions that are not executed on exchange, but it will certainly not spell the end of OTC markets, which had been the original fear.

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