The consensus is that one of the more significant hurdles exchanges in developing markets have to clear is the likely initial reliance of traders, especially international ones, on OTC products. Without reliable liquidity in an exchange traded product there is little advantage to using it instead of going OTC, where the ability to customise contracts to hedge specific risks overcomes theoretical cost savings when the comparable exchange product is illiquid.
In addition, until a new exchange becomes liquid it is less able to benefit from the complementary factors of exchange traded and OTC contracts that are often cited as being in evidence in more established trading arenas. John Mathias, director of financial futures and options at Merrill Lynch, said, "In many cases OTC products are in direct competition with exchanges in emerging markets. The overseas domination of Brazilian OTC, for example, is in part a result of the complex regulatory...