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OTC moves to the exchange? Oh really

Much is being made about the likely migration of various OTC markets on to regulated exchanges, and not surprisingly the larger inter-dealer brokers are not altogether happy with what are glaring inaccuracies in most of the coverage.

While the issue of credit has become serious, it is arguably less so in FX. After all, the market hardly rushed to mitigate credit risk and trade on FXMarketSpace. But this is a story that will run and run.

The same may not be true in other assets, such as credit default swaps. I was recently sent some research by Goldman Sachs. “We expect the turmoil among global banks to drive a change in market structure that favours derivative exchanges over the current OTC arrangements. In our view, heightened awareness of counterparty risk is likely to lead to greater clearing of derivative product,” it said, before announcing it had downgraded Tullett Prebon and Icap to a sell. At the same time, it upgraded Deutsche Börse: “Deutsche Börse is a potential beneficiary of this trend and is looking to win significant CDS volumes. We quantify the potential revenues to be captured from European CDS at c.€300 million.”

All interesting stuff, but as was, I believe, swiftly pointed out to the analyst who produced the work, many OTC markets are already centrally cleared, and history does not support the oft-made claim that products are developed OTC, standardised and then captured by exchanges.

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