The Over-the-Counter (OTC) derivative market has a staggering gross notional of a 600trillion USD and is the cornerstone of global finance. Yet, it is riddled with inefficiencies:
Bilateral OTC trades have 100 trillion USD gross notional and come with exorbitant funding and capital costs. These costs are often passed down to customers, impacting both them and the broader economy.
For banks, the cost of capital is a limiting factor as every trade uses capital, but the business only has a finite amount of capital to deploy.
Non-cleared OTC transactions face large initial margin requirements making them expensive to fund. This is leading to financial institutions reducing their use of the instrument resulting in an increase in systemic financial volatility.
Central Counterparty Clearing Houses (CCPs) became significant after the 2008 financial crisis and were meant to stop it happening again. However, concentration to CCPs has increased to uncomfortable levels making them the new ‘too big to fail’ entities, posing a significant risk to the global financial system.
Lack of Innovation
Despite the vastness of the market, there has been limited innovation to address these challenges leaving a gap for a solution that is both efficient and secure.
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