ISDA®
ISDA - INTERNATIONAL SWAPS
NEWS RELEASE
For Immediate Release, Wednesday, January 26, 2011
For More Information, Please
Contact:
Cesaltine Gregorio, ISDA New York, +1 212-901-6019, cgregorio@isda.org
Deirdre Leahy, ISDA New York, +1 212-901-6021, dleahy@isda.org
Rebecca O'Neill, ISDA London, +44 203 088 2586, roneill@isda.org
Donna Chan, ISDA Hong Kong, +852 2200 5906, dchan@isda.org
ISDA Releases Equity Derivatives Transparency
Studies
NEW YORK, Wednesday, January 26, 2011 – The
International Swaps and Derivatives Association, Inc. (ISDA) today published two
independent studies on transparency in the over-the-counter (OTC) equity derivatives
market. The first paper describes the structure, participants, products and
existing forms of pre- and post-trade transparency for equity OTC derivatives.
This is complemented by a quantitative study which analyzes differences in
pricing amongst dealers and between dealers and end-users.
The paper shows
that the link between listed stock and options exchanges and the OTC market currently
provides significant pre-trade transparency and price discovery mechanisms.
Overall, the paper reports that the industry is evolving towards increased
post-trade regulatory transparency via trade repositories, electronic reporting
and centralized clearing.
The statistical
study, which included analyzing a large dataset and live quote experiments, indicates
that, between dealers, (i) price to fair value discrepancies are found to be
within one or two bid-offer spreads (95% confidence) and (ii)transactions
involving end-users are not further away from fair value than analogous dealer
to dealer trades on average. This finding, that the end-users trading with
dealers are not at an informational disadvantage, is confirmed by the live test.
"These
studies add to the growing body of research and work that ISDA has conducted on
transparency as part of our focus on making OTC markets safe and
efficient," said Conrad Voldstad, CEO, ISDA. "The studies' findings highlight
the different types and amounts of transparency currently available in the OTC equity
derivatives markets, as well as the importance of understanding the benefits
and costs of transparency, particularly with regards to how it may affect
liquidity."
Similar to the
two previous studies on CDS and IRS -- which were all conducted by Finance
Concepts -- the reports on equity derivatives found that it is key to
distinguish between informational transparency and regulatory transparency.
While
informational transparency creates a level playing field for equity derivatives
traded on exchanges, it may not serve well the OTC market where dealers and
clients negotiate large, customized trades, the study finds.
The studies find
that the measures adopted by the industry for the past few years have enhanced transparency
and will increase post-trade transparency for the regulators while maintaining
the same flexibility and privacy that make OTC markets attractive to their participants.
The reports also
conclude that due to the large variety of products, some of which are highly
customized, standardization and central clearing may not be suitable or
feasible across all OTC equity derivatives.
The studies are
the latest in a series of studies on transparency in the OTC derivatives
markets that ISDA has conducted over the past year. Late last year, ISDA
published two other independent studies on transparency with respect to credit
default swaps (CDS) and to interest rates swaps (IRS). For CDS, the study found
that increased transparency may affect large and small trades differently and
suggests it may be necessary to consider different transparency requirements
for large trades. The move towards central clearing of standard CDS contracts,
the study states, will increase the level of transparency as will reporting of
CDS trades to data repositories.
For the IRS market, trade sizes
are large in notional terms but the number of trades tends to be smaller than
other markets such as equity, and trades are more customized to meet clients'
hedging needs. The study finds that the industry would benefit from improving
transparency in key areas, including considering the "end-of-day
dissemination of anonymized, composite post-trade indicators for the interest
rate market either based on current trades going through electronic platforms
or those registered in trade repositories," as this may be more effective
and easier to implement than moving IRS to exchanges.
In
November 2010, ISDA and an independent risk advisory firm conducted a blind
test among market participants on the
liquidity, price transparency and competitiveness of the “plain vanilla” US
Dollar and Euro for the IRS markets. The IRS Test results demonstrate that
the market is extremely liquid with excellent price transparency and
competitiveness for standard-structure swaps between active market participants
and major dealers.
The study also highlighted that a high level of
price transparency can be provided by dealer screens.
ISDA’s survey of
end-users in the OTC derivatives markets, published in October 2010, showed a
great degree of satisfaction with the level of pre-trade transparency for the
largest asset classes and satisfactory levels of transparency for less
frequently used products.
About ISDA
ISDA, which represents participants
in the privately negotiated derivatives industry, is among the world’s largest
global financial trade associations as measured by number of member firms. ISDA
was chartered in 1985, and today has over 800 member institutions from 54
countries on six continents. These members include most of the world’s major
institutions that deal in privately negotiated derivatives, as well as many of
the businesses, governmental entities and other end users that rely on
over-the-counter derivatives to manage efficiently the financial market risks
inherent in their core economic activities. Information about ISDA and its
activities is available on the Association's web site: www.isda.org.
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International Swaps & Derivatives Association, Inc.