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WMBA Refutes Charges as OTC/CCP Debate Heats Up

The Wholesale Market Brokers Association (WMBA) has moved quickly to respond to recent press coverage, which included criticism of the OTC market.

The media comments were attributed to the Federation of European Stock Exchanges, which (unsurprisingly given they are centrally-cleared businesses) argued in a submission to the European Union authorities against the claim that the OTC markets are “at the core of the recent crisis”.

The WMBA also rebuffed claims by the exchanges that OTC markets are unregulated. “The primary regulatory focus in OTC markets is on the participants themselves based on their activity, the nature of their counterparties and type of assets involved,” says WMBA in a statement.

“It is misleading to suggest that the exchange traded markets have a more robust regulatory model. Instances of market failure can also be found in the exchange-traded model therefore implying that it is the individuals or organisations that should be the focus of supervision as is the case in the OTC markets.
 
“The WMBA believes that there is a danger that policy decisions are being considered that may attempt to force OTC products onto exchanges, resulting in a dramatic reduction in liquidity and product flexibility in markets essential for trading and hedging,” it adds.

“Moreover, the individually-negotiated nature of OTC contracts means that they are a more appropriate means to hedge complex or non-standardised risks. It should be noted that many billions of euro of OTC trades are already centrally cleared on a daily basis and there should be no confusion between access to clearing and the utilisation of exchange platforms for execution.”
 
The WMBA says that it “strongly supports” the move towards a central counterparty (CCP) as the most effective step that can be taken to improve the settlement of credit default swaps and other OTC products generally and it acknowledges that regulatory changes will be a response to the current financial crisis.

It underlines, however, that the focus should be on the regulation of market participants and not the mandating of monopolies in the execution of financial products.

“The OTC mode of execution of transactions is fully compatible with the well-publicised industry-wide benefit of reduced counterparty exposure for market participants,” it states. “The WMBA continues to endorse completely industry steps toward these CCPs becoming operational.”

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