The Global Risk Transfer Market: Developments in OTC and Exchange-Traded Derivatives

(WFE Study November 2010, conducted by TABB)

IOMA/IOCA 2 May 2011 Mumbai Marcus Zickwolff Eurex Group

Purpose of the WFE study

• The study should review three questions:  What is the size of the OTC derivative markets  The impact of regulation on OTC derivatives  Estimated cost analysis • Study conducted by the Tabb Group,  Preliminary findings were presented at the WFE General Assembly 11/10/10  Final report was published in November 2010 • Interviews with 28 market participants  Dealers  Buy-side      Hedge funds Corporate end users Exchanges & clearinghouses Interdealer brokers Data providers

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OTC Derivatives markets dwarf cash & exchange traded derivatives in outstandings

OTC, EDT, and Cash Market Comparison Notional Value Outstanding / Open Interest

596 615 547 79 79 61 83 58 48 92 73 33 2007 2008 Over-The-Counter Derivatives (OTCD) Exchange Traded Derivatives (ETD) Source: BIS, WFE Debt Mkt Value Equity Mkt Value

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However, when viewed by notional turnover the picture changes

Exchange-Traded Derivatives Nominal Turnover Over-the-Counter Derivatives Nominal Turnover

2,284 Notional Outstanding / Open Interest Notional Turnover / Volume Turnover Frequency 2,030 1,840 1,690 38 4.2

28 24 23 25 3.4

3.0

3.1

645 2.6

80 1998 2000 2002 2004 2006 2008 2010e 1998 2000 2002

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OTCD mostly in Europe – while ETD more concentrated in US. APAC may speed ETD growth

2,000 1,500 1,000 500 -

14% 64% 22%

2004 2005

OTCD – Notional Turnover 14%

2006

21%

2007 2008 2009

16% 23%

2010e

2,500 ETD – Notional Turnover

8%

2,000

35%

1,500 1,000

8% 37%

500

55%

-

2004 2005 2006

Americas

2007

EMEA

2008

APAC

Source: BIS, WFE, ISDA, FIA, TABB Group

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2009 12% 40% 2010e

OTCD market has shifted away from the dealers

OTCD End User Breakdown % Outstanding Notional 50% 40% 30% 20% 10% 0%

Source: BIS, TABB Group

2006 Broker-Dealers Customers 2007 2008 Other Financial Unknown

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Collateral leading concern of OTCD firms; collateralized trades increased 240% since ’03 Percentage of Collateralized OTC Trade Exposures 70% 60% 50% 40% 30%

CAGR 13.2%

20% 10% 0% 29% 2003 52% 2004 55% 2005 63% 2006 59% 2007 65% 2008 66% 2009 OTCD

Source: ISDA

Source: ISDA, TABB Group

FX Metals Energy Equity Interest Rates

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49%

OTCD reform primary focus in the US: reducing systemic risk and increasing overall market transparency

Focus High Level Concerns Clearing All Eligible Products must be cleared; End users exempt

•

Regulators determine eligibility

•

Hedge exemption may create loopholes Trading Registration Reporting Cleared contracts must be traded on a BOT or SEF

•

Unclear if matching utilities can register as SEF

•

Trading requirement doesn’t apply if no

•

SEF or BOT offers trading Dealers & Mgr Swap Participants must register. Capital will be more tightly regulated

• •

Dual registration with SEC & CFTC w/be Operational nightmare Key terms are still undefined All OTCD must be reported to a trade repository

•

Unclear how regulators will monitor systemic risk

•

Multiple repositories & clearinghouses limit transparency DRAFT

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Source: TABB Group

The greater the volume traded, the lower the transaction cost

1000 100 OTCD - Equity OTCD - Commodity OTCD – Rates CDS

Volume Increase = 5x Cost Reduction

10 1 0.1

1

Source: ICAP

OTCD - FX Cash - Rates FX - Spot Listed Derivatives Cash- Equities 10 100 1000 Average Number of Daily Trades (K) 10000

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Talks w/28 market participants showed some commonality, but conflicting biz models & views

Participants

Top Tier Dealers "New" Dealers Traditional Buy-side Hedge Funds Corporate End Users Exchanges / Clearinghouses Inter-dealer Brokers / OTC Execution Data Providers / Aggregators

Increase DRAFT Decrease Same Positive Negative Indifferent

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Conclusions

• The OTCD market will remain somewhat stagnant until new rules are finalized.  European regulators likely to take a similar approach to US regulators • US regulations to be enacted by fall ‘11; however 6-12 impl. delay expected • Exchanges have opportunity in nearly every aspect of the OTCD market,  However don’t assume these products will fit nicely into their existing models • Dealers & buy-side looking to re-craft business models for the new world.

• Opportunity exists at nearly every level of the OTCD lifecycle.  Larger dealers looking to compete across all facets  Facilitation, Trading, Clearing, Prime brokerage, reporting & analytics • Early focus of the market is in interest rate and credit swaps.  IRS is largest market and presents largest opportunity  CDS remains from an early push by regulators to reduce systematic risk

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