The sub-prime mortgage collapse of 2008 that almost brought the financial sector to its knees has raised countless debates and analysis into how financial markets and certain trading practices are regulated. No asset class has come under the microscope of the regulators more than derivatives, and for good reason. As we know, it was the derivatives market that led to massively leveraged debt during the global crisis.

However, it is specifically over-the-counter (OTC) derivatives, contracts that are traded between two parties without going through an exchange, which have been scrutinised by regulators recently. Unfortunately, over three years on from the biggest financial collapse in living memory, products such as credit default swaps (CDS) and collatorised debt obligation (CDOs) are still going strong.

In short, the very toxic debt that swamped the global economy during the crisis is still very much out there. The OTC derivative market is the largest market for derivatives, and is still largely unregulated with respect to disclosure of information between the banks, hedge funds and investors.

Until recent regulatory changes reporting of OTC was almost impossible because trades could occur in private, without activity being visible on any exchange.

Now in a bid to prevent a repeat of the September 2008 crisis, both the FSA in the UK and the SEC in the states have decided to make it imperative that standardised OTC derivative products such as CDS and CDOs are traded on “lit” exchanges where prices are more transparent, and crucially all trades all reported.

There is no doubting that regulatory intentions are good here. Regulators are enforcing these measures to reduce systemic risk in the markets. The last thing the global economy needs now is another Lehman Brothers style collapse which was triggered by continued borrowing of huge sums of money to fund long term investments in unstable housing-related derivative products.

While recent steps by regulators are a good thing for market transparency, it will trigger yet more market data to flow between the world’s financial markets. As a result, many of the leading financial institutions are looking towards improving connectivity across derivatives markets in order to minimise latency for transactions and data feeds.

With more and more exchanges needing to enhance trading and data connections to the OTC derivatives markets, there will be a demand for additional bandwidth in order to handle the large data volumes this will generate.

Bandwidth is the rate at which a network can transfer data from one point to another, and is typically measured in bits per second. Prior to products such as CDOs moving to “lit” exchanges, the accepted level of data transfers are very high and rising fast. This is even before any new OTC prices and reporting traffic comes onto the exchange.

The good news for the OTC derivatives market is that networks are now planning to cope with this demand. Indeed networks like Colt’s own low latency routes between EMEA financial institutions’ sites can provide great support when it comes to gathering raw or normalised market data faster.

In summary, while no one wants a repeat of the sub-prime mortgage collapse, there is a balance to be struck. In 2009, banks were reported to have made over $20 billion by trading the same derivatives that brought down Lehman Brothers. With the liquidity that is clearly out there in the derivatives markets, it is highly unlikely regulators would ban it outright.

However, this is not to say that because financial institutions now have greater access to data in order to trade OTC derivatives, that smarter regulation should not be enforced around the reporting of trading activity. I would say when it comes to OTC derivatives, this balanced approach of smarter regulation and greater connectivity, would be a safe bet for both regulators and banks. No pun intended.

Tony Moulange is senior business development manager at Colt

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