As competition grows and calls for transparency increase, I would have expected to see market participants rise to the challenge of redefining the over-the-counter (OTC) derivatives market. Nobody should be relying on governments or regulators to push OTC derivatives business their way. Yet many exchanges appear stifled by a fear of innovation, which threatens to prevent them from capitalising on the opportunities being created by the changing regulatory regime.

I believe that one reason for this dearth of innovation in interest rate derivatives is that the market has for far too long been dominated by a small group of large OTC players who have been resistant to change and, indeed, have had no incentive to do so. The market is characterized by inefficiencies with those outside of the ‘golden group’ not able to access trading at fair value.

Unlike other markets such as that for equities, the interest rate derivatives market has not gone through a sustained period of incremental change. For example, MiFID supported innovation in the equities marketplace through the creation of alternative trading venues such as Multilateral Trading Facilities like BATS and Chi-X which increased choice and competition for all users.

My view is that exchanges urgently need to design new products that the market can use in any credit environment. But I am continually astonished by how few examples of innovation I can point to. Following the credit crisis, IntercontinentalExchange (ICE) has brought credit default swaps into an exchange environment with great success for themselves and the market. But beyond that I struggle to identify examples of genuine innovation. Perhaps it’s not surprising that during industry panel discussions, when I challenge the participants to talk about innovation, the conversation is quickly moved on to another topic.

According to a survey published this spring by TowerGroup and SunGard the OTC derivatives market still lacks transparency and efficiency. These are two key issues that the PLUS Derivatives Exchange (PLUS-DX) seeks to address. We have developed 45 USD interest rate swap contracts which mirror the FTSE Medium Term Interest Rate Swap (MTIRS) Indices with a further 45 Euro contracts to follow in the near future. PLUS-DX meets the demands from governments and regulators across Europe and the US to provide exchange-based alternatives to OTC derivatives.

This move demonstrates that, unlike some of our competitors, we see the new regulatory environment that is taking shape post credit crisis as a chance to bring some fresh thinking to the derivatives market.

Furthermore in May TABB Group concluded that coordinated global regulation for OTC derivatives markets is creating a dramatically different environment for interest rate swaps with central clearing for end-users, the use of organised trading facilities and increased transparency and reporting requirements.

As new legislation comes closer a once in a lifetime opportunity presents itself to exchanges to re-define the OTC derivatives market and their participation in the broader market. Yet as far as I can see most exchanges seem distracted and clearly lack the innovation needed to capitalise on this opportunity and potentially offset their declining equity revenues.

Clive Connors is managing director of PLUS Derivatives Exchange