Tackling Post Trade Regulations in OTC Markets

Forex Forex Foreign exchange or forex is the act of converting one nation’s currency into another nation’s currency (that possesses a different currency); for example, the converting of British Pounds into US Dollars, and vice versa. The exchange of currencies can be done over a physical counter, such as at a Bureau de Change, or over the internet via broker platforms, where currency speculation takes place, known as forex trading.The foreign exchange market, by its very nature, is the world’s largest tradi Foreign exchange or forex is the act of converting one nation’s currency into another nation’s currency (that possesses a different currency); for example, the converting of British Pounds into US Dollars, and vice versa. The exchange of currencies can be done over a physical counter, such as at a Bureau de Change, or over the internet via broker platforms, where currency speculation takes place, known as forex trading.The foreign exchange market, by its very nature, is the world’s largest tradi Read this Term Magnates London Bureau were present at 'Trade Tech's', Post Trade, 3 day event last week where industry professionals were discussing the impacts of the new EMIR regulations for OTC derivatives. The credit crisis was blamed on extravagant trading in the OTC markets, where entities were trading with each other in high risk products like CDS's (Credit Default Swaps) without any formal or standard procedures.

After reviewing the 2008 incidents, US law makers had set out new guidelines (Dodd Frank) in the way they regulate and manage OTC products. Spot FX ( in USA) has already been hit as leverage and FIFO rules were implemented, thus impacting the US FX industry.

Trade Tech's Post trade event had distinguished guests from both the buy-and sell side firms all keen to get pointers on what the new regulations may entail.

OTC FX

Across the atlantic the new rules (Dodd Frank), are expected to be implemented in October. The new rulings state that FX swaps and forwards will be exempt from the new regulations however clearing and reporting of non-deliverable forwards (NDFs) and currency options will be subject to the new rules.

Practitioners in Europe have concerns that Esma may exempt NDFs from the clearing process, institutions have already implemented new procedures and spent on infrastructure to be in line with the projected rules on NDF's.

With Spot FX traded off-exchange are the new rules hinting to more LMAX type venues that offer exchange traded derivatives?

Derivatives in General

Day 3 of the event was solely focused on OTC derivatives. From a pricing and Liquidity Liquidity The term liquidity refers to the process, speed, and ease of which a given asset or security can be converted into cash. Notably, liquidity surmises a retention in market price, with the most liquid assets representing cash.The most liquid asset of all is cash itself.· In economics, liquidity is defined by how efficiently and quickly an asset can be converted into usable cash without materially affecting its market price. · Nothing is more liquid than cash, while other assets represent The term liquidity refers to the process, speed, and ease of which a given asset or security can be converted into cash. Notably, liquidity surmises a retention in market price, with the most liquid assets representing cash.The most liquid asset of all is cash itself.· In economics, liquidity is defined by how efficiently and quickly an asset can be converted into usable cash without materially affecting its market price. · Nothing is more liquid than cash, while other assets represent Read this Term point of view; buy-side panelists were stating that the new regulations wont impact firms in isolation, fund managers have many modules including reporting of intraday risks and exposure, back office tools and middle ware etc, there are 5 to 6 service providers who all need to react to the regulations, this means that costs need to be aligned across the cycle.

Many questions were raised over the three days and a whole panel discussion was looking at how the service providers have equipped themselves in dealing with the roll out of the new rulings.

Jacqueline Walsh, Group Derivatives Operational Officer, F & C Asset Management said "technology vendors who are waiting till the last-minute may have the competitive edge as they will be prone to change and their system should be flexible enough to adapt to the legislation".

The event was deemed a success as during the 3 days over 250 delegates attended. Exhibitors at the event included DTCC, MarkitServ, Eurex, Sungard and other solution providers.

Overall, it seems that market participants welcome the new regulations however with trading conditions getting tougher by the minute, will the new rulings be a hindrance to finding alpha in these volatile markets?

Trade Tech organises industry specific events across the worlds financial centres, the all important FX event is taking place next week where buy-side members will address the most important topics affecting the FX markets. The QE3 measures have already impacted the markets as Gold is still in a rally and the dollar has weakened against major currencies.