Galen Stops argues that despite the increasing standardisation of derivatives contracts regulatory changes are actually making these contracts harder to price.
Despite regulators the world over attempting to reduce
the number of opaque OTC contracts traded in favour of more
transparent and standardised ones, the increasingly complexity
of the regulatory requirements are being reflected in
According to Jim Jockle, senior vice president of marketing at
Numerix, despite efforts to shine a light on derivatives
trading by regulators, pricing contracts has become more
"If you think about what’s going on in the
marketplace at the moment, with the push to standardisation and
central clearing, the root of standardisation means a fungible
contract in and of itself," he says.
"It has repeatable terms and conditions and all things are
linear within the contract in terms of maturity, dates, options
as well as liquidity behind it."
But Jockle argues that even in a very liquid market, like
the CDS market, there’s only about 1,800 single
names and the rest of the market is very thinly traded with
more complex derivatives that are harder to price. Specific
terms in the contract changes the valuation because
there’s more embedded risk and therefore
standardised methodology for pricing is no longer
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