INTRODUCTION
Global derivatives markets are facing change on an unprecedented scale following the introduction of business-to-business (B2B) derivative exchanges. B2B transactions are predicted to exceed USD900 billion in value by 2004 according to "B2B Exchanges: The Killer Application in the Business-to-Business Internet Revolution" by Arthur Sculley and William Woods. In comparison the same book reports that business-to-consumer (B2C) transactions are estimated at just USD108 billion in value by 2003. Until recently the media has reported primarily about B2C Internet companies but analysts are now predicting that B2B Internet companies will present a tectonic shift in the way that businesses buy and sell from each other.
In essence the B2B process represents a rewiring of the way in which buyers and sellers interact and conduct business.
WHAT IS A B2B DERIVATIVES EXCHANGE?
A B2B exchange is a central market space where buyers and sellers meet online and negotiate to buy and sell derivatives products at a mutually acceptable price in accordance with the rules of the exchange.
THE BENEFITS OF B2B
B2B introduces powerful benefits including the following:
Procedural Benefits
* Greater standardization of derivatives documentation
* Streamlined business processes
* Time savings
* Fewer transactional errors
Lower Costs
* More buyers and sellers
* Greater liquidity
* Price transparency
* Wider selection of prices and products
* Client management
Increased Capacity
* Increased productivity
* Expanded market
* Revenue management for parties trading on the
exchange, and for the exchange.
B2B AND DERIVATIVES MARKETS
The derivatives markets present a model environment for the B2B process with high levels of efficiency and the associated benefits of liquidity and price transparency leading to greater revenues for both traders and the exchange.
The ability to remove market inefficiencies, to rapidly expand markets geographically and the low cost of getting connected, irrespective of geographical distance, has the potential to increase productivity to a new level. This allows the online exchanges to handle flow business, while derivatives staff can be deployed on transactions that are more complicated and structured.
The global reach of the Internet allows for a huge increase in the number of counterparties, which can be dealt with efficiently on a day-to-day basis, with online exchanges thus improving and extending client relationships. It also allows derivatives staff to serve multiple customers simultaneously.
Access to real-time market data, historical data, documentation solutions, better pricing and valuation models, and risk analysis provide both derivatives staff and customers with greatly improved levels of service.
B2B exchanges allow traders to access and exchange information quickly, easily and anonymously if desired.
LOOKING AHEAD
The exponential growth of B2B derivatives exchanges and the support they are receiving from wholesale financial institutions is proof enough that the business model is valid and accepted. This has resulted in major banks and brokers committing to funding online exchanges in exchange for an equity stake. However, to ensure future success, exchanges have to clear a few hurdles:
* A hybrid approach is essential. In order to achieve this,
derivatives professionals should maintain use of the B2B
exchange while continuing to employ traditional methods
of human intervention to provide added value and
maintain relationships. This role of relationship
management extends to facilitating the execution of trades
on the exchange. What is evident from current practice is
that the level of human interaction required is directly
related to the financial products that are being traded.
Vanilla products will require far less facilitating than
complex derivatives such as credit default swaps.
* Liquidity is of prime importance
* Value added services need to be provided such as historical data, pricing models and analytics
* Exchanges need to stay neutral in order to be credible and build trust
* Customer service is key with traditional derivatives sales professionals responsible for marketing the site as well as the product.
* Exchanges must have global reach in order to adequately serve institutions with a similar global reach
* For as long as participants require it, there needs to be a facility to show trading interests to a specific audience only
* Successful exchanges tailor their business model to match the target market's distinct characteristics
CONCLUSION
Derivatives markets are facing an exciting challenge with technology providing new tools to facilitate derivatives trading. The upshot of this will be that the processes involved in trade execution through to settlement will become yet more efficient and refined.
This week's Learning Curve was written by Bobby Console-Verma, head of credit product online sales at CreditTrade in London.
