I remember a lot of discussion about moving CDS to exchange or central clearinghouses back in 2008, but I haven’t really heard much about it since. Any idea how exchange-traded derivatives (obviously beyond futures and vanilla options) have changed in the past few years?
I don’t know much about CDS, but yes they are talking a lot about moving swaps to Exchanges. But swaps market is already so competitive among brokers that much of it is already categorized in flow business or not structured business, spread are already tight here. If you assume you can move a certain set of standardized swaps to exchanges, it makes thing easier for brokers, now they’ll be able to offer much complex swaps to clients and hedge easily because of availability of a liquid market of standardized swaps. Though algo trading firms would be taking in a decent amount of additional money trading spreads, but that’s already small compared to total revenue. You can’t really standardize all sorts of swaps, the possibilities are endless, and it gets more tricky when you start taking about Quantos, swaptions, autocallables etc etc. With exchange traded swaps, you have a fairly good possibility of seeing whole new wave of innovative structured products with lesser premiums and hence more buyers. Imagine it like having array of products to play in interest rates, or play a combination of interest rate and equity, it’ll be possible because of ease of hedging. As far as CDS is considered, I guess it’ll be better for CDS market too if some standard CDS move to exchange, it’ll bring down spreads but it’ll open possibility of new and bigger range of products that couldn’t be offered before because of difficulty in hedging. The more structured products you’ll try to standardize, the more exotics brokers will start offering. It’s like a worm, if you cut it, it’ll multiply and grow bigger.
As far as current trends in Exchange Traded Derivatives are concerned, you are continuously seeing new products to lever more and more as well as new products to invest in practically everything that exists.
Thanks for the info.