just a bit worried. Given current freezing market and obama's word (to rebuild wall street...), guess lots of OTC products will be banned under tighter regulation and more transparancy, and most of major banks will be excluded to OTC market (since they are rely on govn't lifeline). Currently our job is just to review all the existing OTC derivatives and make risk profile book for them. Boss wont tell what the future strategy but cutting risk (cutting headcounts) is already going on. Lately prop trading of our bank has been heavily cutted, some trades are even closed. What will 2009 look like?...are we even expecting a worse year?

i doubt that they can stop people trading between themselves if they want to. the factr is however counterparty risk is going to be a much bigger factor going forward and such there will either be more collateralisation of such risk or movement to an exchange. having said this, i doubt that we shall see a great increase in the trading of long dated products on exchange - say 5x5 swaptions or 5 year S&P options.

QuoteOriginally posted by: QFsurvivaljust a bit worried. Given current freezing market and obama's word (to rebuild wall street...), guess lots of OTC products will be banned under tighter regulation and more transparancy, and most of major banks will be excluded to OTC market (since they are rely on govn't lifeline). Currently our job is just to review all the existing OTC derivatives and make risk profile book for them. Boss wont tell what the future strategy but cutting risk (cutting headcounts) is already going on. Lately prop trading of our bank has been heavily cutted, some trades are even closed. What will 2009 look like?...are we even expecting a worse year?Depends on how pissed off the taxpayer gets. The overleverage / liquidity flood/collapse has become a taxpayer liability now.Look at it this way: if you want no defaults between big companies, exchange trading has served this purpose just fine for 150 years. No defaults on a daily mark to market, ever. Why would the big joints ever avoid such an arrangement? Expense, for one. But mainly because it quashes their ability to turn derivatives issuance into a money printing exercise. That is, it's way harder to play games with your balance sheet.

Yes, many current OTC products will be driven into open exchanges or become subject to unfavorable regulations. Nonetheless, OTC will always have a role in the industry for the reasons mentioned by Daveangel. OTC will continue to be used for instruments that have some combination of: low volume, idiosyncratic terms or payoff structures, terms specific to the particular counterparties. The sell-side likes OTC because it gives their salescritters a chance to schmooze money out of customers. The buyside likes OTC because they think they are getting some special secret deal not available to other players. I suspect that a good fraction of financial innovations start in OTC when one seller or one buyer want something new,create a one-off OTC deal, and it turns out to be useful.I don't think that converting from OTC to exchanges is a panacea. Open exchanges are hardly proof against bubbles, overoptimistic ratings, and concomitant crashes. The dotcom bubble wasn't hidden behind OTC and even the housing bubble was created using largely transparent real estate transactions (data on transactions, mortgages, and borrowers' credit scores are so inexpensive as to be nearly public). Mass delusion can readily happen (perhaps is even more likely to happen) in the broad daylight of open exchanges than in the dark alleys of OTC.As for QFsurvival's employer, I don't see why the switch from OTC to exchanges necessarily means an end to their business. People will still need risk analyses of the existing inventory of instruments for as long as the contracts run. And the move to open exchanges will mean an expansion in the numbers of investors and speculators who are considering these types of instruments. Perhaps the diversity of instruments and volume of transactions may decline in the short-term, but they will continue to exist. Moreover, if some clever folk slice these instruments into retail-sized chunks (e.g., a mini-CDS covering $100,000 or less), then the universe of potential customers will expand significantly.

it's not possibble to ban otc b'coz it would require banning all kinds of private business transactions (=planned economy). politicans often critizes something b'coz they don't understand their own laws and institutional frameworks, or just finger pointing. it's simple: politicans ban something specific. the public is happy. lawyers come up with an idea to get around. lobbyists label it with a new buzzword. so there is the substitute. therefore, it doesn't make sense.

Glad to see you guys are all optimized about this. I hope I am wrong, just recent situation really confused me -- 1st-year analyst. I also saw in our internal announcement, complex structured products are out of the favor of corp clients and even banks. Structured product can cover all different market factors. We already see credit structured product died in the water (our credit trading is almost shut...sent two MDs home). what other "complex" will be eliminated?

well, a very good question, it seems to me however we can find no answer for thatfrom my point of view, OTC might would die for a period of time, but not forevermarket instruments need to be improved step by step while speculators never give up any chances to grab stake