Chapter 8 (6-8): OTC, Bond Trading & Blockchain Flashcards
Trades have increasingly been migrating from registered exchanges to what kinds of venues?
1) Multilateral Trading Facilities (MTFs)
2) Organised Trading Facilities (OTFs)
This has increased regulation aimed at regaining transparency in the market
What clearing and settlement model is increasingly popular for both OTC and exchange based trades?
A central clearing house who act as counterparty for both sides of the trade
What benefit do OTC contracts have that there is no inclination to give up?
The flexibility of their contracts, exchange markets are standardised whereas OTC markets can offer many different forms of swaps etc.
However standardised trading is still prevelant, e.g. the london metal exchange
What do futures benefit from?
Standardisation and transparency. This results in liquidity.
What are the advantages of the OTC market?
More flexible allowing for tailor made products.
Derivative market is significant allowing for exposure to new markets
Enables stable pricing
What are the disadvantages of the OTC markets?
No secondary market due to lack of standardisation
No clearing house increases default risk materially
Very opaque with fewer regulations
What are the three ways in which dealer to dealer trading occurs?
Direct telephone contact
Inter-dealer brokers voice broking
Electronic markets
Dealer to customer is done via voice trading or electronic platforms
What types of bonds trade on exchanges and what types trade OTC more frequently?
Highly liquid issues like G10 Govt bonds will trade on exchanges - electronically and via IDBs. This also applies to large corporates and agencies.
Lower liquidity bonds or more volatile instruments trade OTC. (This is done through the request for quote)
When getting a quote for a bond, what is a buyer looking at?
Price and Yield
Yield spreads are also important
