Icap releases guidance on OTC markets

The future course of the over-the-counter derivatives markets will depend on the simplification and overhaul of existing infrastructure so that it becomes more transparent, Risk heard at an Icap press briefing this morning.

On Monday, the interdealer broker published a white paper, entitled “The Future of the OTC Markets,” in which it called for a reform of risk management practices, trading infrastructure and transaction processing of OTC derivatives.

During the briefing, Mark Yallop, chief operating officer of the group, highlighted six ways to improve the functionality of the OTC markets. Noting price transparency as one of the key goals that the markets are trying to achieve, he called for the more widespread impelementation of electronic trading.

“There should be more use of electronic trading, because it increases the transparency and visibility of transactions and prices and also increases the efficiency of post-trade processing," he said.

Yallop also called for more dealers to implement portfolio compression techniques in derivatives markets as a way to reconcile the difference between net and gross portfolio risk. He also stressed the need for the broad adoption of compression, stating that the technique has generally not caught on among buy-side institutions, while calling for greater use of pre-booking netting.

Yallop stated that there should be quicker settlement cycles for derivatives and securities markets, and also called for the introduction central counterparties where they are not yet available and an increased focus on improving portfolio reconciliation techniques.

“The interest of the markets and the interests of the regulators are closely aligned," said Yallop. "The industry is short of capital, has cost pressures and the need to reduce risk; all of these recommendations would reduce costs and lower risks.”

See also: Clearing the way ahead
November target for CDS central counterparty
Banks move to central clearing across asset classes