News

Dear Sir

Your leader today, "Equal opportunity derivatives trading" requires clarification.

The editorial seems unable to separate the two distinct functions of an exchange and a clearing house. In the case of oil derivatives, for instance, the member firms of the London Energy Brokers Association specialise in broking both OTC as well as futures on exchanges. Two-thirds of these trades are cleared by either the CME/Nymex or ICE (Intercontinental Exchange). 

Secondly, the FT assertion that OTC deals are "beyond the reach of much regulation" is incorrect. The overwhelming majority of participants in the OTC markets are authorised and regulated by one of the main regulatory bodies, and there is always at least one regulated party in every deal.

Thirdly, the reference to “cutting out intermediaries...." is misleading. OTC deals are usually transacted directly between two counterparties requiring no intermediary; unlike futures transactions which require other parties at several levels. Your claim that exchange trading and central clearing would make derivatives trading cheaper is wrong. The costs of both tend almost always to be more expensive than OTC deals, and this disregards the fact that most exchange liquidity originates in the OTC markets.

The G20 has taken up the US Administration proposals and stated that "all standardised derivative contracts should be traded on exchanges or electronic platforms, where appropriate, and cleared through central counterparties by end 2012 latest". We would emphasise that electronic platforms are not necessarily exchanges and in particular, we would draw your attention to the Administration’s requirements for the Alternative Swap Execution Facility (ASEF) and our members are able to fulfill this role.

Testimony given in Washington this year by the ICE Chairman, Jeff Sprecher, backs up many of the points outlined above. He said that forcing trading on exchange would increase costs to hedgers and potentially provide misleading pricing information. His counterpart at the CME, Terrence Duffy, did not support mandatory clearing either, concluding “We hope our views on the importance of the OTC market and the costs and dangers of mandating clearing and exchange trading will be given significant weight, given our position as the apparent beneficiary of such mandates.”

We believe that all trading venues need equal and fair access to central clearing in order to endorse market integrity and empower the end user. This requirement was supported recently by Gary Gensler, Chairman of the CFTC at the House Agriculture Committee when he stated “clearinghouses should be required to take on OTC derivatives trades from any regulated exchange or trading platform on a non-discriminatory basis”.

Yours faithfully,

Alexander McDonald

CEO, London Energy Brokers’ Association (“LEBA”)

www.leba.org.uk

The original leader can be found here:

http://www.ft.com/cms/s/0/c59cfa8e-b3e4-11de-98ec-00144feab49a.html