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The attraction of OTC clearing

Had an interesting week in the sunshine at the FIA annual conference at Boca Raton, Florida. Not surprisingly, the main topic was the move to bring the worlds of exchange traded and OTC derivatives together. This has been mandated by politicians/regulators on both sides of the Atlantic and will lead to the creation of a multitude of electronic platforms known as SEFs in the US and OTFs in Europe… or will it?

Despite all the noise and hoopla, market participants seem to be huddled together at the top of the diving board waiting for someone else to take the plunge first. Regulatory uncertainty is definitely one reason, but there is also a real sense that there will be far more of these things than the actual trading volume (as opposed to notional outstanding) will be able to support. Maybe a better option then is to be the guy offering the aggregation layer that allows traders to smartly scan the total liquidity across all the different platforms. By combining the available liquidity into a single virtual display, all sorts of further revenue generating opportunities start to become apparent, so maybe it’s a case of first mover disadvantage on this one.

But just as in equities, the real prize is in clearing and the ability to offer margin or position offsets between different but related instruments. The LSE’s acquisition of LCH.Clearnet looks like a great move as it will enable it to leverage the mighty OTC SwapClear franchise. On the other hand, the mountains of ETD open interest held at EUREX Clearing, CME Clearing and others provide different starting points for portfolio margining. The question then is: which will prove to be the strongest magnet?

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