WMBA – Americas Principles for Enhancing the Safety and Soundness of the Wholesale, Over-The-Counter Markets, OTC Markets, and Products:
1. OTC products are those instruments, properties and commodities that are not listed and traded on a central exchange but are transacted in bilateral transactions between market counterparties.
2. Many of the most efficient and most liquid markets in the world are American OTC market. These include:
• US Treasuries and other fixed-income securities,
• Repurchase transactions,
• interest rate swaps,
• foreign exchange and
• credit default swaps
3. Many OTC markets feature:
• Highly regulated market participants: Wholesale brokers and their professional staffs are extensively regulated in the US by the SEC, the CFTC and FINRA and abroad by numerous regulatory agencies, including the UK’s FSA.
• a high degree of electronic execution,
• open access to central counterparty clearing (CCP) and
• comprehensive trade confirmation, settlement and reporting utilities.
4. As a general matter, the OTC markets are much larger, more cost effective and far more innovative than exchange traded markets. It has been estimated that more than 90 percent of Fortune 500 companies use OTC derivatives among other OTC products. Just as farmers routinely hedge against a future drop in commodity prices, corporate debt issuers and manufacturers routinely use OTC contracts to hedge the interest rate, credit and currency risks associated with their business operations.
Role of Wholesale Brokers in OTC Markets:
1. Wholesale brokers are intermediaries that facilitate access to OTC and exchange traded pools of liquidity across a full range of asset classes and their associated derivatives.
2. Wholesale brokers generally match buyers and sellers in bilateral transactions.
3. In OTC markets with central counterparty clearing, wholesale brokers effect transactions and then present the trade to the clearinghouse.
4. In some OTC cash and derivative markets, wholesale brokers utilize highly sophisticated electronic execution systems with automated trade confirmation and straight-through-processing links to market participants.
5. Wholesale brokers also provide OTC market transparency through publication of market and pricing trading data.
The members of the WMBA-Americas advocate the following principles:
1. Open Centralized Clearing. WMBA Americas supports the development of central counterparty facilities for the novation, clearance and settlement of OTC contracts including OTC derivatives. WMBA Americas believes that central counterparties should be required to be open, neutral and provide all execution platforms with non-discriminatory access to the clearing facilities.
2. No Mandatory Exchange Execution. We do not support the forced channeling of OTC trading or its markets and products onto regulated exchanges. Such efforts would stifle innovation and competition and raise transaction costs. Wholesale brokers, through their regulated electronic trading platforms can achieve the desired efficiencies and transparency without stifling competitiveness and innovation.
3. More Effective Regulation of Wholesale OTC Markets and/or their Participants. The WMBA-Americas supports enhanced regulation of the OTC cash and derivatives markets that provides regulators with effective tools and means to monitor and police markets and participants. This includes greater market transparency achieved through: (i) enhanced reporting requirements for all market participants, (ii) incentives to encourage centralized clearing and standardization of OTC contracts; and (iii) wider adoption of technology. Any regulatory changes should be focused and carefully considered, and should not stifle innovation, market liquidity and product development. The WMBA-Americas supports enhanced OTC markets regulation that keeps American OTC markets competitive and strengthens participant’s confidence in these critical markets.
4. Encouraging Competition and Innovation. Efforts should be made to enhance institutional investors’ confidence in the integrity and fairness of our OTC markets. Sophisticated market participant should have the ability to choose when, where and how they will trade and manage their risks. The development of new competitive trading venues should be encouraged, not discouraged. Innovation should not be stifled by increasing barriers to entry – barriers that would become insurmountable if there was mandatory exchange trading of OTC derivatives.
5. The Use of Regulated Electronic Transaction Execution Systems. The US Treasury Department’s White Paper on Financial Services Industry Regulation identifies “Regulated Electronic Transaction Execution Systems” (“RETES”) as suitable platforms for execution of OTC derivatives transactions. We believe that many of the electronic trading platforms operated by the US wholesale brokers are an exact match for the RETES concept. Our members combine actively-used electronic trading systems, sophisticated pre and post-trade transaction support technologies and automated trade capture and confirmation systems providing fast and effective regulatory transparency along with decades of market experience, deep liquidity in cash and derivative financial products, and neutral and non-proprietary trade execution service.
The WMBA and its members look forward to working with US policy makers, legislators and regulators in developing the RETES criteria and other regulatory standards and continuing to serve their customers in healthy US financial markets for decades to come.