CLEARING: OTC Derivatives Market is A OK, Aite Reports

Everything is A OK in derivatives.

That’s what consultancy Aite Group said about the Over the Counter derivatives market, despite the increase in fragmentation in trading venues and projected consolidation among the central clearing counterparties (CCPs). The findings are part of its latest research report, “OTC Derivatives Clearing in 2014: Pump Up the Volume.”

The conclusion stems from data Aite gathered in Q1 2014 from the clearinghouses and CCPs that currently clear over-the-counter derivatives transactions across the globe and those that have announced they are planning to set up such operations in the next two or three years. Clearers provided clearing volume data for the last two years, where available, and detailed their roadmaps to add further capabilities in the near term. Data sampling included CCPs from all over the world-North America, Europe, the Asia-Pacific, the Middle East, Africa, and Latin America.

Aite Group predicted that the current global playing field with a limited number of CCP participants will not remain for long, given the number of domestic and regional players planning to establish and operate their own OTC derivatives clearing operations globally. These new CCPs will put Latin America, Africa, and Australia on the map for OTC derivatives clearing-at least in the short term. The long-term future of incumbent and new CCPs, however, will be determined by their ability to grab sufficient market share to warrant continued operation.

“We forecast that incumbents are unlikely to disappear, and CCPs offering multi-asset clearing will dominate,” said Will Woodward, research associate in Institutional Securities & Investments at Aite Group. “Dominant market players such as LCH.Clearnet and ICE Clear are unlikely to disappear from the scene, even if new entrants are able to gain some traction, because clearing is and always will be a volume game for those with the largest global footprint and the broadest asset class coverage.”

Third-party service providers to the OTC market participants could gain as well. As standards diverge and the number of CCPs to which firms must connect increases, third-party providers will see a growing opportunity to provide services such as reconciliation, matching, cross-referencing, clearing gateways, and message support.