OTC Is Not a Pantomime Villain for U.K. Minister Hoban

Over-the-counter derivatives, traded off exchange, perform important functions for the economy and for the people who trade them, U.K. Treasury Minister Mark Hoban will say in a speech in Istanbul today.

Regulators around the world have sought tougher rules for OTC derivatives since the collapse of Lehman Brothers Holdings Inc. and the government rescue of American International Group Inc., two of the largest traders in credit-default swaps. The European Union plans to set out which derivatives must be cleared through exchanges in its European Market Infrastructure Regulation initiative.

“OTC is not a dirty word,” Hoban said in prepared remarks for an audience of exchange executives and lawmakers gathered in Istanbul for the Federation of European Securities Exchanges’ annual conference. “Exchanges represent the beating heart of the European market structure. But what sometimes commands less attention in regulatory debates is the complementary role played by bilateral dealer markets in serving modern end users’ needs. This is particularly the case in bond and derivative markets.”

Regulators want clearinghouses to process more OTC derivatives to reduce systemic risk. Exchanges including Deutsche Boerse AG’s Eurex Clearing operate as central counterparties for every buy and sell order executed by their members. These traders have to post collateral, reducing the damage to other market participants if they default.

“It is in these markets where intermediaries can play a particularly useful role,” Hoban will say in his speech. “Stepping in to bridge the gap between buyers and sellers; helping users to hedge their risks and meet their investment objectives. So to portray OTC as the pantomime villain -- without acknowledging the function it can perform in the real economy -- is a temptation that must be resisted.”

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