Clearing and settlement of over-the-counter derivatives remained a hot topic at the Swiss Futures and Options Association’s 30th Burgenstock meeting last week, withseveral participants outlining a future with higher transaction costs but lower systemic risk as more and more OTC players move their business into arenas with central clearing.
Several exchange execs – including those from NYSE.Liffe, Eurex, and Nasdaq-OMX – made it clear they no longer believe that move will lead to a proliferation of new exchange-traded products that replace OTC instruments. Instead, it will reinforce the rise of clearinghouses – leaving established exchanges to expand their product base by moving into emerging markets.
As if to highlight that trend, a leader from the Mexican exchange MICEX announced it was contemplating the sale of an equity stake to CME Group, which already has a cross-holding in Brazil’s thriving BM&F BOVESPA. Spanish exchange MEFF has a stake the Mexican Derivatives Exchange (MexDer), leaving Argentina’s two futures exchanges – Buenos Aires’s Mercado a Termino de Buenos Aires and the Rosario Futures Exchange (ROFEX) – the only major Latin American players not affiliated with a big-brother exchange in the North.
The two have long won high marks for creating innovative products that deliver the core value that commodity futures deliver – mainly, helping farmers and other producers hedge or monetize their risk. Both providefutures products that support smaller cash-market exchanges around the country, and both have maintained their independence for more than 100 years. But Mercado a Termino marketing boss Araceli Basurto and ROFEX operations boss Ismael Caramsaid the two are beginning to speak about cooperation with each other.
The comments came during a Friday panel entitled 'Latin America and Derivatives – the way forward', which – tellingly – not only took place in the Victoria Jungfrau’s main hall, but to a packed house.
Until recently, the emerging markets forum took place in small rooms before the Burgenstock Meeting officially opened, and the number of panelists often threatened to eclipse the number of observers. The Swiss integrated that forum into the main program two years ago, and emerging markets took center stage last year – largely due to India’s masterful command of the event as host country.
This year, Switzerland itself served as host to mark the 30th anniversary – and the Latin America panel was the only one focused on a specific region rather than a specific theme.
Other panels focused on emerging markets in general – and also drew overflow crowds.
South Africa’s Johannesburg Exchange's Rod Gravelet-Blondinsummarized the consensus when he offered his view of the future: namely, a proliferation of emerging-market exchanges, followed by consolidation that leaves four to five major liquidity providers astride the world, with regional exchanges serving local markets by trading either at a premium or discount to the global players – and, most likely, sharing the big players’ platforms.
On the clearing front, the European Commission’s head of financial market infrastructure, Mario Nava, answered last month’s complaint from the Association of Corporate Treasurers that moving OTC derivatives onto clearinghouses and raising capital adequacy requirements will be expensive. He didn’t, however, answer that the costs would be lower than projected in the short-term. Instead, he argued that the reduced systemic risk is worth the price – and that increased competition among clearinghouses would eventually drive prices down. He also added that the Commission wouldn’t let the pendulum swing too far in the direction of miserly liquidity.
CFTC Commissioner Michael Dunn pointed out that systemic risk has a price as well – one that is now being borne by the taxpayer, even as the beneficiaries of that risk cash in their chips.