The Wholesale Markets Brokers’ Association (WMBA), a trade body representing interdealer brokers, has hit back at recent comments from the Federation of European Stock Exchanges (FESE) that blamed over-the-counter (OTC) instruments for the current financial crisis.
In a statement issued yesterday, WMBA “firmly rebuffs” FESE’s claims that unregulated OTC markets were at the core of the turmoil.
“It has been widely accepted that the crisis is a result of several seismic economic and financial forces,” the statement said. “The epicentre of this was the transformation of bank lending through securitisation into highly complex credit products that originators, rating agencies, buyers, and sellers of protection found difficult to value correctly, find liquidity for, or to hedge.”
The association also asserted it was misleading for FESE to suggest that exchange-traded markets have a more robust regulatory model, and that instances of market failure can also be found in the exchange-traded model.
On Monday this week FESE published a letter sent to Jacques de Larosiere, chairman of the High Level Group on Cross-border Financial Supervision, which stated, “The current crisis originated from the US and specifically from the unregulated part of the market, i.e. structured products and OTC derivatives… with lighter or no product disclosure and traded on an OTC basis without trade transparency or counterparty clearing.”
FESE’s statement also emphasised the importance of market structure surrounding all market instruments, noting the disproportionate regulations of on-exchange instruments compared to others. The association suggested there should be a level playing field between instruments and venues to ensure that similar rules apply to all services and activities.
In its rebuttal, WMBA underscored what it sees as the dangers of forcing OTC products on to exchanges, warning that this would result “in a dramatic reduction of liquidity and product flexibility in markets essential for trading and hedging”. However, it supports the move to establish central counterparty clearing for credit default swaps and other OTC products to reduce counterparty exposure for market participants.