DERIVATIVES MARKETSMARKETS

José Antonio Pérez RodríguezTraining Coordinatorg

BME Institute

BOLSAS Y MERCADOS ESPAÑOLES /BOLSAS Y MERCADOS ESPAÑOLES / SPANISH EXCHANGES

DERIVATIVES MARKETS

1. Structure of organized derivatives-markets.

2. Main products involved in organized derivatives markets: options & futures.

3. Organized derivatives markets versus OTC.

4. The current debate.

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1. Structure of organi edorganized-

derivatives market

Structure of organized derivatives marketsStructure of organized derivatives-markets

MARKET:

T di• Trading• Data distribution

SETTLEMENT AND CLEARING HOUSE:SETTLEMENT AND CLEARING HOUSE:

• Clearing and Settlement• Marginsa g s

Regulated Markets: UE Directive 2004/39 establishes the need to be authorised by an official-regulated body

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regulated body.

Structure of organized derivatives-marketsMarket

g

Point of Meeting between Buyers and Sellers

Exchange Rules

Trading System

Members Structure

Data distribution

Events resolution

INTERNAL REGULATION

Rules and Regulations• Rules and Regulations• Circulars

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Structure of organized derivatives-marketsg“If I owe you one pound, I have a problem. However, if I owe you one million pounds, the problem is yours” (John Maynard Keynes)

Settlement and Clearing House

It guarantees completion of transactions and acts as counterparty in all operations

M e m b e r M a r k e t

a n d S t t l t &

B u y e r

M e m b e r S e t t le m e n t &

C le a r in g H o u s e

S e lle r

The Counterparty Risk is completely transferred to the Settlement and Clearing House.

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Organized derivatives-markets in the worldg

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2. Main products i l d iinvolved in organized-organized

derivatives markets: options & futuresoptions & futures

Products involved in organized derivatives-

50.000.000

Number of contracts traded in MEFF (Bolsas y Mercados Españoles)markets

40.000.000

45.000.000

50.000.000

Index Futures

30.000.000

35.000.000Index Options

Stock futures

15 000 000

20.000.000

25.000.000 Stock options

5.000.000

10.000.000

15.000.000

0

2004 2005 2006 2007 2008

Source: MEFF (Bolsas y Mercados Españoles / Spanish Exchanges)

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( y p p g )

Products involved in organized derivatives-markets

Ranking Market Jan-Dec 2007 Jan-Dec 2008 % Variation

1 CME Group 3.158.383.678,00 3.277.645.351,00 3,8%

2 Eurex 12.704.209.603,00 3.172.704.773,00 17,3%

3 Korea Exchange 2.777.416.098,00 2.865.482.319,00 3,2%g , , ,

4 NYSE Euronext Liffe 1.525.247.465,00 1.657.791.242,00 9,9%

5 CBOE 945 608 754 00 1 194 516 467 00 26 3%5 CBOE 945.608.754,00 1.194.516.467,00 26,3%

6 BM&F Bovespa 794.053.775,00 741.889.113,00 6,6%

24 MEFF 51.859.591,00 83.416.762,00 60,9%

Number of traded or settled contractsSource: Futures Industry

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Source: Futures Industry

Products involved in organized derivatives-marketsEvolution of volatility: VIX index (january 2008 to date)Evolution of volatility: VIX index (january 2008 to date)

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3. Organized-d i ti k tderivatives markets

versus OTCversus OTC

Organized derivatives-markets versus OTC• Behind the affirmation “derivatives are weapons of mass destruction” (Warren Buffet),

a very heterogeneous reality is hidden:

Organized derivatives markets versus OTC

a very heterogeneous reality is hidden:

REGULATEDMARKETS

SETTLEMENT ANDCLEARING HOUSE

STANDARDISATIONGUARANTEE OFCOMPLETION OF

OPERATIONS

NON-REGULATEDMARKETS

BILATERALAGREEMENTS

NON-STANDARDAGREEMENTS

RISK OFCOUNTERPARTY

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Organized derivatives-markets versus OTC• Different sizes of the market:

Organized derivatives markets versus OTC

Source: Bank for International Settlements Year 2007

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Source: Bank for International Settlements. Year 2007

4. The current d b tdebate

The current debateThe current debate

• Concerning derivatives, the recent financial crisis has shown us thatguarantee of completion of operations is a goal to achieve, avoiding in thisway counterparty risk.y p y

• To achieve this goal, the Settlement and Clearing House (derivativesorganized-markets) has a key roleorganized markets) has a key role.

• Having a Settlement and Clearing House means an effort oft d di ti f d t d thi i t l iblstandardisation of products, and this is not always possible.

• One of the potential implications of this scenario is the potential contractionof the size of OTC markets.

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Th kThank you

Palacio de la Bolsa. Plaza de la Lealtad, nº 1 - 28014 MADRIDTel. +34 91 589 13 17 · Fax +34 91 556 64 41

japerez@bolsasymercados es

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japerez@bolsasymercados.es