Follow Us

Follow us on Twitter  Follow us on LinkedIn
 

04 October 2010

AFME publishes an OTC protocol for default trades


Default: Change to:


The protocol allows a signatory to strike cash balance for open trades with a signatory that defaults and follows the model already used in other OTC markets, such as stock lending and swaps and derivatives.


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%."

 

Full report 

© AFME


< Next Previous >
Key
 Hover over the blue highlighted text to view the acronym meaning
Hover over these icons for more information



Add new comment