News & Opinion

Thomas Murray has always understood and supported the value of bespoke OTC derivatives contracts, which meet highly specific economic needs not found in the regulated marketplaces. What cannot be overlooked, however, is that OTC derivatives contributed significantly to the Global Financial Crisis of 2007-2009. One factor behind this contribution was the poor information on bilateral positions. Contracts had not been confirmed with counterparties, different terms were noted on contract notes, and on and on the information gaps went: there was no overall picture in the autumn of 2008 as to who owed what to whom, and what a given counterparty’s positions and ability to meet its commitments were, not to mention the sudden realisation that nobody knew the true value of the contacts. And so the OTC markets largely froze.

The data IOSCO gathered from its members last year made it clear that individual investors continue to be serious buyers of complex, leveraged OTC products. If there were not a genuine world-wide investor protection problem, IOSCO would hardly have bothered to write extensively on the state and extent of the question, prepared suggestions for national capital markets regulators, and submitted those to public review before endorsing final recommendations.

A core function of Thomas Murray is to provide independent, detailed third-party monitoring of post-trade service providers in the world’s capital markets. It has done so for over two decades, and has established a considerable database across 100+ marketplaces, expertise, and a reputation for rigour.

A key objective for G20 countries announced at their Pittsburgh Summit in 2009 was to reduce systemic risk in the global financial system by moving over-the-counter (‘OTC’), bespoke derivatives into central clearing houses. The bilateral risk is assessed and taken onto the books of the CCP for the entire life of those instruments. To achieve that level of risk management over the entire term of each contract, the OTC contracts had somehow to be standardised, which by definition is a contradiction with their specific, tailored nature and purpose. It was always going to be hard to square that circle; the CCP segment was not made for this purpose.

Of all the elements required to make a marketplace function, financial information is the most valuable. Since the dawn of time, an information advantage – and the time to make use of it ahead of others - has been the source of greatest gain to anyone who had it. Examples range from the return of special couriers who raced back to London after the Battle of Waterloo in 1815 to today’s high-speed algorithm trading shops paying additional fees to ‘co-locate’ their computer servers immediately next to those of the exchanges themselves. Having that edge is clearly critical, whatever the technology, or these presumably intelligent individuals would not strive so hard to get and keep it.

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