An Answer to Changing OTC Markets


The housing market in the town south of London where I live is pretty typical for the UK, with everything from two-bed flats to large family homes. Flats are bought and sold almost daily, often sight unseen, by residents or investors. In this case, prices are easily compared as most flats have similar specifications.

Large family homes with various distinguishing features such as land and pools sell less frequently. Property websites show details and pictures thus bringing some level of access to available stock on the market. Yet I know from experience that many remain unadvertised where sellers, anxious not to show their hand, entrust their real estate agent to screen authentic offers from the merely curious buyers.

In other words, those in the housing market can choose the most appropriate way to buy or sell a property depending on the type of home it is.

A similar dichotomy exists in derivatives markets between standardized, transparent exchange trading and the odd or large lot, customized over-the-counter (OTC) trading markets.

While the final rules are not yet known, it seems certain the Dodd-Frank Act and MiFID will mandate more electronic trading of OTC markets.  CME Direct, the new trade automation service for OTC markets that we are announcing today is a big step towards preparing for those mandates.

CME Direct provides access to the deeply liquid, exchange-traded markets on CME Globex that participants know and trust, and on the same screen allows for electronic trading of OTC markets.

We have chosen to take a distinctly pragmatic approach in our solution to the approaching mandates that recognizes that not all trades are equal. The more complex side of trades may require a more personal touch, so we have partnered with some of the world’s largest, best-known inter-dealer brokers, including Marex Spectron, Tradition Financial Services, Tullett Prebon and a range of other brokers who will allow their customers to trade on their respective liquidity. This will bring electronic trading to their oil brokerage businesses, while retaining the flexibility for their customers in the mode of execution.

As we approach a new era where electronic trading mandates will shape OTC markets, participants will need that flexibility, whether they’re trading deeply liquid exchange-traded markets or customized OTC products.

Just like in the housing market, it is up to the market participants to choose which system suits them best.

Michel Evaraert is managing director of OTC solutions, OTC products and services at CME Group.

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