Paper No. 54, December 2016

MAS Staff Paper No. 54, December 2016

Liquidity and Policy Analyses for Platform Trading of OTC Derivatives: A Perspective of Smaller Markets

- By Jerome Chow, Jonathan Tan, Justin Wong


This paper analyses the criteria for assessing when it might be appropriate to mandate the trading of standardised over-the-counter derivatives on trading platforms, in the context of smaller OTCD markets. Based on a review of academic literature, this paper examines the benefits and the challenges of a trading mandate and puts forward a two-stage assessment framework, comprising a trading infrastructure test and a product test. These tests seek to identify the appropriate conditions for implementation of a trading mandate, taking into account the associated risks of market fragmentation and regulatory arbitrage.

This paper also introduces a methodology to assess the liquidity of a product by employing a clustering technique. The clustering technique utilises a wide range of liquidity metrics observable from trade repository data and assigns a liquidity rating to each product. Lastly, this paper analyses the costs and benefits of public dissemination of anonymised transaction-level post-trade data from the TR as an alternative to improve market transparency.

Last Modified on 16/12/2016