Greenwich Associates
January 2010
Synopsis: The summary below displays the general conclusions from the Greenwich Associates Report, Centralized Clearing of OTC Derivatives: Devil in the Details. We believe this report portrays an important perspective regarding derivatives reform. The study indicates that many traders and executives are still unclear about how the proposed OTC derivative legislation will influence them, and that regulators should more fully consider how this legislation will affect corporate hedging practices.
A new Greenwich Market Pulse shows that corporations and financial institutions agree that moving OTC derivatives trading to a system of centralized clearing would be an effective means of managing both counterparty risk at an individual level and marketwide systemic risk.
Financials and corporates also have some serious concerns about the ongoing process of market structure reform. Some of these concerns stem from the fact that market participants are uncertain about details of the proposals being considered. Other concerns involve more informed questions among users of OTC derivatives about how the switch to centralized clearing would impact overall market liquidity and costs, as well as corporates' ability to effectively hedge risk positions.
Although 53% of the 330 investors and corporate executives surveyed globally by Greenwich Associates from January 11-15, 2010 describe themselves as familiar or very familiar with current proposals to establish centralized clearing for OTC derivatives, a surprisingly high 47% of respondents say they are either entirely in the dark about these initiatives or less knowledgeable than they would like to be about the details of the proposals.
Two clear conclusions emerge from the study results:
- The marketplaces requires more information directly from regulators about the timing, scope, and specific provisions of centralized clearing initiatives in various markets and jurisdictions.
- In taking steps to mitigate systemic and counterparty risk in OTC derivatives markets, regulators must be sure to address serious concerns about not only the primary impact of reforms on market liquidity and functionality, but also secondary consequences such as the impact on or new limitations on current corporate hedging practices.