Research & Thoughts

Is the Party Over for Over-the-Counter?

While governments react to voters’ sense that they let the global financial industry get “out of control”, the aftershocks of the crisis continue to be felt, generating a climate of suspicion in which public and media perceptions are dominated by words like “toxic” and “junk”.

Governments and regulators alike must be seen to be taking action to ensure that the market mayhem of 2008/9 cannot happen again. Control, transparency and regulation are now cultural imperatives, and as a result, legislative momentum is gathering pace in both Europe and North America.

Although achieving real control and transparency will not be straightforward, it will inevitably impact the way financial institutions do business, especially in OTC derivatives. While commentators disagree about the feasibility and even the desirability of a move to Central Counterparties and straight-through processing, there is no doubt that the clearing of OTC products is undergoing a paradigm shift. Regulated standardisation will soon be de rigueur.

Some players will resist. Others will be late adopters who lose out. The winners will be institutions with a profound strategic understanding of the new environment. This will be reflected in an operational infrastructure and technology practice that accommodate growing complexity, in areas from connectivity through to processing.

The winners will be the institutions which effectively plan ahead to re-purpose key aspects of their operational practice, and then reap the rewards.