William Tovey Banking Group plc

William Tovey Banking Group plc

Introduction

The paper begins with an examination of derivatives within the banking group consists of three subsidiary companies, WT Investments and Securities Ltd, WT Trust Company Ltd, and its main retail and business banking arm, WT Bank plc. What they are and where there are calls for their use to be regulated in both UK and global capital markets and economies. The forms regulation could take, as proposed by the William Tovey Banking Group plc, are considered. The paper then reviews the principal concerns of regulatory bodies and concludes with a look at the latest developments in trading and regulation.

Recommendations were submitted to players in the capital markets and their comments sought by means of telephone interviews. These comments are listed. The principal aim of regulation - the reduction of any market volatility - is discussed and some suggested regulatory instruments evaluated.

William Tovey Banking Group plc

Risk management techniques are primarily structured to reduce risk. Derivative instruments, used as risk management tools, have potential to be more risky than the underlying cash instrument, though the exchanges on which many derivative instruments are traded help to spread risk. When two companies do a deal, a clearing house, usually owned and operated by exchange members' firms, steps in to become the counterparty to both trades. If one party defaults, the other will not suffer unless the default is so huge as to exhaust the exchange's own capital reserves. However, the over-the-counter (OTC) markets do not have this concept of a central clearing house, and it is quite possible that risk management strategies may prove to be fatal in the event of adverse price movement. Combinations of factors - like new methods and risks, the lack of a relevant framework for keeping records, and the focus of derivatives' activity among only a few large players in the market - could result in a precarious situation. Nevertheless, as de Boissieu states:

Derivatives provide an important and efficient means of risk management for financial and non-financial firms.

In 1993 the Commodity Futures Trading Commission (CFTC) reported that:

By any measure, the worldwide growth of the over-the-counter (OTC) markets in derivative products during the past decade has been extraordinary.

The fact of their growth is well-documented and the G-30 (Group of Thirty) describes derivatives as a “major financial activity” (G-30, 1993).

Contracts described as “derivatives” include futures, options and swaps, although the underlying principle of derivative contracts is based on futures and options. Futures contracts typically deal in large volumes and thus pose significant risk in the case of default. The larger a futures transaction, the greater the risk of default. The counterparties to such large risks therefore tend to be corporations, financial institutions, investment banks or sovereign entities. The growth in the use of derivative instruments has led to the concentration of risk management in large financial institutions - one of the factors which have contributed to the set of circumstances leading to the current debate on the subject.

Financial markets play a prominent role in ...