Navigating risk in the OTC space with enhanced market data
How can access to more reliable market data help participants in the OTC derivatives market navigate liquidity risks and identify market opportunities in an evolving sector?
Our exclusive survey of perspectives from leading participants in the OTC market has revealed a sector well-placed to lay the foundations for more effective operations in 2024 and beyond. There are high levels of confidence among market participants that they have the capabilities needed to carry the market forwards, and a general openness to embracing innovation. Given this, the stage is certainly set for smoother operations at an opportune moment for OTC derivatives, which are seen as a promising hedge against volatility.
Chapter three of our state-of-the-market report explores how access to reliable, in-depth data can be used to strike the right balance between risks and opportunities in an evolving market.
Navigating liquidity challenges
An increase in regulatory oversight and the establishment of central counterparties (CCPs) has put the OTC space on a more stable footing than previous years, which is an important milestone for establishing confidence in the sector’s growth potential – it is currently projected to reach $25.81 trillion by 2032. However, while growing regulation has helped lift market confidence, respondents are concerned by a subsequent decrease in liquidity in the market, driven in no small part by historically high interest rates.
Risks posed by this growth in liquidity challenges include rising price volatility, a lack of CCPs willing to engage in large trades, and greater difficulty entering and exiting market positions. Given the challenges present in the market, there is a greater need for more data to power the algorithms and models that can help participants more effectively manage risk and identify opportunities.
Many buy-side respondents worry that they are over-reliant on the sell-side for their information and would benefit from open and accountable third party data providers to get a better (and more objective) read on the market.
Supporting the AI transition
As the OTC markets evolve, there will be a greater need for access to data in order to support the market’s transition to AI-powered infrastructure. It’s an encouraging outcome of our survey that market participants broadly support this move to leverage AI and machine learning in order to improve processes and unlock profitability.
However, despite overall confidence within the market that there is enough data available, there are concerns among some the buy-side that there is not currently enough data to support this transition without incurring additional risk. When the focus shifts to areas of APAC such as Hong Kong, these concerns grow stronger, with significantly less confidence in the levels of data needed.
While the markets seem generally aligned on the potential for harnessing AI in order to deliver enhanced execution, it is important the buy-side is supported to overcome any barriers to fully realizing the benefits. With the OTC space at an inflection point for growth and change, there is a need for all parties to embrace a mindset of adaptability and to gain a fuller understanding of the risks – and opportunities – present in the market. Read the report for more insights.
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