Tuesday, May 19, 2009

Icap welcomes plans to curb OTC derivatives

Icap, the world’s largest inter-dealer broker, has welcomed sweeping US proposals to clamp down on over-the-counter derivatives markets, arguing that it was well positioned to take advantage of the move.

Tim Geithner, US Treasury secretary, last week outlined the Obama administration’s first steps in bringing greater transparency to the OTC derivatives markets, parts of which have been blamed for contributing to the financial crisis.

It said it would require “standardised” OTC contacts to be processed through a central clearing house; called for the shifting of standardised parts of the OTC markets to regulated exchanges and “regulated transparent electronic trade execution systems”; and for the development of a system by which prices could be made more transparent.

The move was widely seen as positive for traditional exchanges, especially those with their own clearers. But it could hurt inter-dealer brokers, which act as intermediaries in the negotiation of OTC contracts between banks and clients. ichael Spencer, Icap chief executive, said the proposals were “not surprising, logical and a good thing”.

“I think it is just a directional push by the regulators to say ‘we want a broadly different approach from the OTC market’. Icap, which today reports full-year figures, said it was less at risk of losing business as a result of the Geithner initiative because it has already been developing post-trade services that accompany clearing.

The company argues it is also less dependent than rivals Tullett-Prebon, GFI Group and BGC Partners on voice-brokered OTC contracts for revenues. Icap is part of a consortium bidding for LCH.Clearnet, Europe’s largest independent clearing house and a large clearer of OTC interest rate swaps. If successful, the consortium would give Icap a stake in a crucial piece of clearing infrastructure at a time when such businesses are set to gain from the Geithner plans.

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