But over the counter (OTC) trading is vulnerable to many operational risks. In particular, investors are exposed to the default of the major broker-dealer counterparties. This was a significant concern to counterparties of Bear Stearns when it was in distress before being taken over by JP Morgan. To moderate such concerns in the future, private sector initiatives are being developed to introduce a central clearer to the CDS market. Such initiatives are very welcome. Although the net positions of CDS dealers generally represent only a very small fraction of their gross positions, because these gross positions have grown so rapidly in recent years, inter-dealer positions can sometimes be very significant – even after netting. A central clearer that would offset any long bilateral positions that one bank had with another with any short positions that the same bank had with a third bank, could significantly reduce the counterparty risk in the CDS market. A leading proposal at present is centred on the Clearing Corporation, which is jointly owned by eleven major banks and other trading platforms. 34 Counterparty risk, as described above, is particularly corrosive for liquidity in financial markets. Investors become concerned not only with the soundness of their immediate counterparties but their counterparties’ counterparties, and so on. When risk crystallises it can be unclear which financial institutions have been adversely affected. As a result of limited disclosure and transparency, investors may limit the supply of funds to a much broader array of counterparties than necessary.
Hence, it is clear that not only are the present day poor nations struggling in the emerging, highly complex and controlled economic environment, they are also facing reduced resource transfers, and not being accorded special treatment they should be afforded in order to propel them out of poverty. Some may however argue that the tremendous benefits of globalization has levelled the playing field and that advantages are available to any and all who care to access, and it is just unfortunate if some persons are unable to take advantage of these conditions. Nevertheless, I believe we are all aware that weaker communities have lesser chances of access and that situation leads to widening even further, the ever-widening gap. Therefore, it is timely and appropriate that this forum addresses the need to impress upon the more wealthy nations to increase aid flows, open out greater trading opportunities, and move towards higher investment and resource build-up in the lower income countries. Lest I be misunderstood, let me add that, not for a moment am I suggesting that the progressive steps the world and the international community have taken over the past few decades in developing new standards and norms are in any way, inappropriate or unwelcome. Those initiatives were certainly necessary and have been beneficial for the overall advancement of society.