News
2009-04-27 - LEBA WELCOMES CITY OF LONDON REPORT ON OTC DERIVATIVES MARKET
Press Release
LEBA WELCOMES CITY OF LONDON REPORT ON OTC DERIVATIVES MARKET AND ITS IMPORTANCE TO LONDON
Industry Body Warns on Consequences of Moving OTC Derivatives on to Exchange
The London Energy Brokers Association (“LEBA”), an independent industry body representing the world’s largest energy Inter-Dealer Brokers* welcomes and endorses the conclusions drawn in the City of London Corporation (“the Corporation”) paper \'Current issues affecting the Over-the-Counter (“OTC”) Derivatives Market and its Importance to London\', prepared by Bourse Consult.
In particular, LEBA agrees that evidence suggests that the extreme losses in financial institutions that have been suffered during the credit crisis arose from investment activities in Collateralised Debt Obligations (“CDO”), Asset-backed Securities (“ABS”) and similar structured credit products, rather than in the Credit Default Swap (“CDS”) market itself. The CDS market has price and transparency characteristics that do not apply to the structured product markets, and is well supported by widely accepted legal documentation.
The Corporation is also right to draw attention to the efficient way in which CDS contracts were closed out after the Lehman default, which represented an extreme stress test in a live situation. All participants in OTC markets seek greater safety and security, and the experience of the way in which the CDS market has been managed during the crisis gives comfort in that respect. The move towards central clearing, which LEBA has endorsed in statements on 1/12/08 and 19/2/09, will bring even greater security to OTC markets.
Commenting on the report, David Clark, Chairman, LEBA said, “LEBA strongly supports the paper’s conclusion that any attempt to move OTC products onto exchanges would result in a diminution of liquidity in both OTC and exchange-traded markets. This, in turn, would have potentially severe consequences in the real economy as end users of OTC markets such as governments, corporates and pension funds would experience difficulty in hedging their risks and obtaining the financial products necessary to achieve their investment and financial targets.
He continued, “Moreover, OTC markets are truly global in nature and are essential to the generation of wholesale financial market products used widely in both developed and emerging economies.”
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*Inter-dealer brokers are independent agents that facilitate access to OTC and exchange traded pools of liquidity across a full range of asset classes and their associated derivatives. After 25 years of growth, it is estimated that on average about two million OTC trades corresponding to about $5 trillion in size occur daily across the range of FX, interest rate, credit, equity and commodity asset classes in both cash and derivative forms.
Note to Editors:
London Energy Brokers Association (LEBA) represents the world’s leading energy wholesale brokers including markets oil, gas, electricity, freight and emissions. For further information on LEBA and its members, please visit www.leba.org.uk
The Wholesale Market Brokers Association (WMBA) is an independent industry body representing the world’s largest Inter-Dealer Brokers (IDBs) operating in wholesale financial markets including interest rates, credit, and foreign exchange and equity derivatives.rn
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