Looking South for Inspiration
What is often overlooked in the debate around derivatives reform and standardization of products in particular is that there are examples all over the world where the vast majority of contract volume takes place on exchanges and electronic platforms with central clearing, and far less on a bilateral basis. To wit, this is not a blog entry about whether Dodd-Frank is correct in its aims and implementation so far, but rather that when we move our analytical framework out of North America or Europe and take a look elsewhere in the world we can find useful market structure insights and even inspiration. In Brazil, 90% of all derivatives are standardized. Since 1994, all OTC derivatives transactions are required to be registered with trade repositories that are self-regulatory organizations. Argentina also offers useful insights. In Argentina, a 2007 regulation provided incentives for trading derivatives on exchanges or other regulated electronic platforms that offer guaranteed settlement. In 2010, about 75% of derivatives were centrally-cleared in Argentina and either traded on exchange or electronic platform, while bilaterally traded and settled derivatives comprise the remaining 25% of the market. Even more interesting, the central bank puts a microscope on these positions by closely monitoring the use of non-standardised OTC derivative products. They require institutions to provide notations in their quarterly financial statements about the use of bespoke products. As a result, according to the G20 Financial Stability Board, the market regulators and government “do not have plans to introduce mandatory central clearing requirements given the high level of standardisation, exchange and electronic platform trading and central clearing that already takes place” Clearly, other ways of conducting transactions and organizing market structure can enable a more inspired and informed debate.