The recent market crises and the subsequent regulatory awakening have contributed to the evolution of a new market category in addition to our Over the Counter Market and Exchange Market.
The new regulatory prescriptions by way of central clearing of OTC derivative products and the subsequent discussions to aid in the rulemaking process have contributed to my thought process on this Hybrid Market.
As this new market has features borrowed from both OTC and Exchange markets, it would be but fair and fit to name this market as Hybrid Market,
Some of the salient features of this Hybrid Market identified are:
Trading – Bilateral, Resemble OTC markets
Clearing – Centralized, Resemble Exchange Markets
Counterparty – CCP, Resemble Exchange Markets
Participants – Typically larger dealers and higher rated market participants, Resemble both OTC and Exchange Markets
Market maker importance – Significant, Resemble OTC Markets
Collateral practices – Margin requirements uniform for all, Resemble Exchange Market
Margin movement – Centralized enforcement by CCP, Resemble Exchange Market
Risk buffers – Equity and margins Equity and margins, Resemble both OTC and Exchange Markets
Clearing and settlement – Centralized, Resemble Exchange Markets
Netting – Exposures are netted multilaterally and position is against a CCP, Resemble both OTC and Exchange Markets
Regulation – Self regulation, reliance on market practices and public sector regulation of CCP, Resemble both OTC and Exchange Markets
Transparency of exposures – Detailed information available but not disseminated, Typically Hybrid!
Transparency of prices – Pre trade prices are not binding quotes, No automatic publication of transaction prices, Resemble OTC market
Resemble OTC market
Product features – Standardized and liquid, Resemble Exchange Market
This Hybrid Market tends to borrow the best features of OTC and Exchange Markets. The risks in OTC market and the rigidities of the Exchange Markets are adequately taken care of by this Hybrid Market.
Let us hope this Hybrid Market meets the requirements of the market participants and becomes an active market. In due course of time.
Who knows? This Hybrid Market may even replace the OTC and Exchange Markets completely.
One may agree!