OTC RIP

On Monday, the Intercontinental Exchange, ICE, announced that as of January 2013 all of its cleared OTC energy swap products would switchover and be traded as futures products.

This is one of the outcomes of the Dodd-Frank Act’s reform of the OTC derivatives markets. A very large fraction of swap transactions are economically identical to futures transactions, and the only rationale for that portion of the OTC market had always been evasion of regulation. Now, with the OTC swaps market subject to a parallel set of regulations substantially comparable to the regulation of futures contracts, the rationale for trading many products as OTC swaps is gone.

The OTC swaps market will continue to provide customized products not suitable for trading and clearing on futures exchanges, and in its press release, ICE confirmed that that portion of its OTC swaps business would remain: “All uncleared swaps will continue to be listed on ICE’s OTC platform, which will register as a swap execution facility.”

During the debates over reform of the OTC swaps market, much was made of the OTC market’s ability to offer customized products. While this ability was advantageous, its relevance to the size of the OTC market was always exaggerated. ICE’s announcement for its energy products is likely to be just the first in a major switch back to futures trades for a sizable fraction of the OTC market. The exact extent and the timeline for this switch will depend on many factors, including the ongoing battles over how specific rules are implemented and the ongoing shakeout in the future business model for banking.

4 Trackbacks

  1. […] has been about the swaps industry losing market share in those standardized derivatives which, like the ICE cleared energy swaps, were easily moved over to the futures market. Let’s focus instead on preserving the swaps market […]

  2. By Futurization #2 – why? « Betting the Business on November 13, 2012 at 3:31 pm

    […] is exemplified by the recent decision by the ICE to simply switch its cleared energy swaps into futures contracts. There was more to it than simply […]

  3. […] cleared energy swaps were already standardized in the same way that a futures product needs to be; that is why they could be readily repackaged as futures. Important market players, however, misunderstood this […]

  4. By Moody’s Slips on ICE « Betting the Business on August 10, 2012 at 11:39 am

    […] specific ICE swap products being moved over to its futures platform are not customized. As noted in an earlier post, many, many swap products are not especially customized, and that’s true of these ICE products. […]

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