Hey Financial Times, Get Your Derivatives Lingo Straight!

Also published on the Atlantic Monthly’s Business Channel.Yet another news organization has mangled Tim Geithner’s plan for over-the-counter (OTC) derivatives. This time, it’s the Financial Times. A few people at the FT have done a great job covering derivatives, particularly Gillian Tett and the folks at FT Alphaville. But the FT article in question makes the same mistake that NPR made, which is to conflate a Central Counter Party (CCP) with an exchange. The article states that because Geithner’s plan will –

require clearing of “all standardized OTC derivatives through regulated central counterparties,” [it] marks a sweeping change to the way OTC derivatives are handled, implying a shift away from the dealers at banks who brokered such contracts to the formal exchanges that have long jealously eyed the huge OTC markets.

That is false. A CCP is not an exchange. A CCP is somewhere that trades get moved to after they’ve been executed.

First the trades are executed directly between the parties, then they get moved to a CCP. So, under Geithner’s plan, trades cleared on a CCP would still be entered into between buy-side clients and OTC dealers. This means that the dealers are not losing business to exchanges, at least not under this part of Geithner’s plan. In fact, the market has already started moving dealer-to-dealer trades onto CCPs in anticipation of this kind of regulation.

If you’re interested in reading more about CCPs, you can read my break down of Geithner’s plan here and another article on the benefits of CCPs here.

Originally published at Derivative Dribble and reproduced here with the author’s permission.

One Response to "Hey Financial Times, Get Your Derivatives Lingo Straight!"

  1. Guest   June 20, 2009 at 12:31 am