Summary The majority of sovereigns do not post collateral to support their use of over-the-counter (“OTC”) derivatives1. As a result, dealers regularly have credit exposure arising out of these contracts which is often hedged with the sovereign Credit Default Swaps (“CDS”), and interest rate and foreign exchange swaps and options. This process has been of particular concern in Europe because of the possible ban on the use of sovereign CDS. To assist in highlighting this and other concerns arising out of the practice not to collateralize OTC derivatives, two associations2 (“the Surveying Associations” or ”SAs”) conducted a survey of dealers earlier this year, regarding their OTC derivatives exposure to European Sovereigns (“ES”).

Executive Summary It is often reported that the proportion of European equities trading that is over-the-counter (‘OTC’) is approximately 40%. Our analysis of market data demonstrates that this figure is incorrect and the proportion of equities trading represented by ‘real’ OTC trades is actually around 16%. The European equity market landscape has been transformed since the implementation of the Markets in Financial Instruments Directive (’MiFID’) in November 2007. New trading venues have been established and new execution techniques developed to compete for a share of the circa €1.7 trillion per month European equity market. The post-MiFID evolution of the European trading environment - from a few centralised platforms to multiple fragmented venues - has brought many benefits, but also uncertainty. One such uncertainty relates to the quality and utility of data on OTC trading. AFME has analysed data from the largest brokers in the European market covering equity trades reported as OTC under MiFID during the period from Q1 2008 to Q3 2010. According to our analysis, approximately 60% of all reported MiFID OTC equity trades in this period were actually duplicate trades already reported elsewhere. These are herein referred to as ‘OTC Reporting Events’- i.e. trades which must be reported under MiFID but are not true indicators of transaction volume. The remainder of OTC trades include actual transactions not reported elsewhere, herein referred to as ‘OTC Real Liquidity’. Our analysis shows that OTC Real Liquidity trades represented approximately 16% of all European equities turnover in the same period.