An international multi-asset class exchange wanted to establish an OTC clearing operation for commodity derivatives to complement its existing commodity futures contracts. The new service would allow users to submit wholesale OTC commodity transactions to the exchange for trade confirmation, settlement and clearing.
Scope of work:
Investigate the workings of the OTC commodity derivatives market and the potential for an OTC clearing service that would benefit and complement both the physical and the financial markets.
Project objectives:
- Understand the workings of the existing OTC commodity derivatives market including volumes, participants and trading methods;
- Identify the strengths and weaknesses of the existing OTC and exchange markets;
- Design new contract specifications that met both the physical and exchange market participants needs; and
- Map out the flow of trading information from execution through to settlement and clearing.
Challenges:
- Internal exchange politics;
- Market scepticisms of a new or different method of trading; and
- Resource allocation.
Methodology:
- Desk research to identify the supply and demand fundamentals:
- Identify the major market participants and their objectives;
- Investigative interviews with market participants to discuss the workings of the market, existing practices and strength and weaknesses of the system; and
- Seminars and workshops to “sell” the new service and allay any fears due to self-interests and misunderstanding.
Outcome:
The project was delivered on time, within budget and accepted in full by the client.
