The Association for
Financial Markets in Europe (AFME) published a new over-the-counter (OTC)
protocol for banks and investment firms trading with each other bilaterally,
which is to be followed in the event of an insolvency of a signatory.
OTC currently represents
less than 25% of the European equity market. To date, investment firms from the
UK, France, Germany
and Switzerland
have signed up to the protocol. Administrators for Lehman Brothers had to deal
with tens of thousands of open trades and it became clear that improvements to
contractual arrangements were required between banks trading cash equities
bilaterally. As well as saving time and cost, it provides added certainty in
the event of a counterparty becoming insolvent. The OTC protocol does not
extend to trades covered by exchange rules or trades covered by other
contractual arrangements.
John Serocold, Managing
Director of AFME commented: “The purpose of this OTC protocol is to provide a
way to limit and manage the risks arising on insolvency of open bilateral cash
equity trades between adhering banks and investment firms. They will benefit
from the ability to manage their risks and, if appropriate, put their customers
in the position they would have been in, had the trade settled as expected.“
“It is launched at a time
of heated debate surrounding the true size of the OTC cash equity market.
Contrary to some reports suggesting OTC represents 40% of the equity market,
AFME studies show that the true figure is nearer 25%."
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