Over-the-counter equity derivative officials last week were buzzing about a Securities and Exchange Commission move that could boost non-listed derivatives usage. The agency approved Chicago Board Options Exchange proposals that include OTC derivatives in portfolio margin calculations for the first time. From April 2, when the rules come into effect, the inclusion of OTC instruments could increase capital available to institutions.
Gary Compton, spokesman for the CBOE, declined to speculate on the scale of the increase this might mean for either OTC or listed derivatives but he noted, "We feel that these changes will be the biggest change to the securities business in the past couple of decades." Douglas Engmann, managing director of equities at Fimat USA in San Francisco, said under the rules OTC derivatives become more valuable than they have been in the past. Fimat has been running a pilot program of the rules for some of its customers. "This is a massive change," he added. Even though a start date is slated for April it could be several years, however, before all firms are up and running under the system because of the scale of the changes and the requirement to get approval from the CBOE for this type of risk-based portfolio margining.
In the rest of the world, OTC volumes outstrip exchange-traded because investors like the structural flexibility, in terms of strikes and maturities, and OTC instruments have long been recognized for portfolio margining.
The rules, which also apply to other instruments such as exchange-traded funds and index options, were designed by the CBOE to bring portfolio margining inline with exchanges in Europe and Asia and therefore increase trading of its own listed instruments. A by-product of this, however, is that it lifts what previously was seen by some as a penalty for using over-the-counter derivatives.
