10:24 pm - Monday December 18, 2017

Hybrid Markets – The markets of the future

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!

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