In an independent study of the OTC derivatives markets, The International Swaps and Derivatives Association, Inc. (ISDA) has raised questions about the feasibility of standardization and central clearing of some varieties of the instruments given their highly customized nature.
The study also claims pre-trade transparency and price discovery mechanisms implemented in markets in recent years have led to post-trade transparency for the regulators while maintaining the same flexibility and privacy that make OTC markets attractive to their participants, the organization said in a statement about the reports.
However, ISDA was keen to point out the difference between informational transparency and regulatory transparency. While informational transparency creates a level playing field for equity derivatives traded on exchanges, it may not serve well the OTC market where dealers and clients negotiate large, customized trades, ISDA reported.
Overall, the paper reports that the industry is evolving toward increased post-trade regulatory transparency via trade repositories, electronic reporting and centralized clearing.
The study found that, between dealers, price to fair value discrepancies are within one or two bid-offer spreads (95% confidence) and transactions involving end-users are not, on average, further away from fair value than analogous dealer-to-dealer trades.
“These studies add to the growing body of research and work that ISDA has conducted on transparency as part of our focus on making OTC markets safe and efficient,” says Conrad Voldstad, CEO of ISDA. “The studies’ findings highlight the different types and amounts of transparency currently available in the OTC equity derivatives markets, as well as the importance of understanding the benefits and costs of transparency, particularly with regards to how it may affect liquidity.”
The reports may be found here.
[Related story: Interoperability still a distant prospect, Global Custodian, Summer 2010]