The Wholesale Market Brokers Association (“WMBA”), an independent industry body representing the world’s largest Inter-Dealer Brokers* welcomes and endorses the conclusions drawn in the paper by Bourse Consult commissioned by the City of London Corporation (“the Corporation”) ‘Current issues affecting the Over-the-Counter (“OTC”) Derivatives Market and its Importance to London.’
In particular, the WMBA agrees that evidence suggests that the extreme losses in financial institutions that have been suffered during the credit crisis arose from investment activities in Collateralised Debt Obligations (“CDO”), Asset-backed Securities (“ABS”) and similar structured credit products, rather than in the Credit Default Swap (“CDS”) market itself. The CDS market has price and transparency characteristics that do not apply to the structured product markets, and is well supported by widely accepted legal documentation.
Bourse Consult is also right to draw attention to the efficient way in which CDS contracts were closed out after the Lehman default, which represented an extreme stress test in a live situation. All participants in OTC markets seek greater safety and security, and the experience of the way in which the CDS market has been managed during the crisis gives comfort in that respect. The move towards central clearing, which the WMBA has endorsed in statements on 1/12/08 and 19/2/09, will bring even greater security to OTC markets.
Commenting on the report, David Clark, chairman, WMBA said, “The WMBA strongly supports the paper’s conclusion that any attempt to move OTC products onto exchanges would result in a diminution of liquidity in both OTC and exchange-traded markets. This, in turn, would have potentially severe consequences in the real economy as end users of OTC markets such as governments, corporates and pension funds would experience difficulty in hedging their risks and obtaining the financial products necessary to achieve their investment and financial targets.
He continued, “Moreover, OTC markets are truly global in nature and are essential to the generation of wholesale financial market products used widely in both developed and emerging economies.”