October 26, 2011

Exotic OTC contracts- there’s an app for that!

A new business has launched a business which on face value appears to be offering “apps” in the style of the iPhone AppStore or Android Marketplace. Looking deeper, and reading the explanatory material, perhaps ‘apps’ isn’t really what this business offers, it’s more to do with packaging “exotic” OTC contracts for browsing, although the contracts on offer are indeed delivered to you as an app for your PC or smartphone.

The approach is for a seller of an exotic contract to gather all the necessary documentation such as a term sheet, detailed long form confirmation, an excel pricing sheet, and contract categorisation, to enable buyers of such contracts to browse and download these pre-packaged ‘apps’ containing all they need to understand the product on offer. Once you find a contract of interest, you are able to download the first two apps free per day, and a small charge for the third onwards.

Once you have your app, which is password protected, you are able to unwrap the contents and discover much more detail about the structured product being offered, and to then anonymously contact the provider for further Q&A, or if you wish to execute a trade, enter direct communication.

The design of the business is to host an on-line catalogue of apps on offer, or in other words, basic details of the types of structures and which asset classes they apply to, for interested parties to browse – therefore not becoming a trading platform, more an introduction service, which would fall outside regulation.

The key problem DerivaTrust are wanting to solve, is the ease with which sellers of customised risk management solutions can reach an audience, and conversely for buyers of complex or exotic products, to find the sellers quickly. Once the introduction is made, it is up to each party to complete the documentation, pricing and confirmation process using their own means, DerivaTrust doesn’t get involved.

The model of browsing exotic contracts at the DerivaTrust marketplace seems to over-simplify solving a complex risk management problem by wrapping the solution into a virtual filing cabinet – surely the buyer would want to sit down with a seller and develop the solution together, given the non-standard bespoke nature of exotic contracts? Maybe in future the buyers will have a wider choice of pre-built solutions and bring liquidity (if that make sense with a bespoke contract) to the exotic OTC market.

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