- 2 - Derivatives – The Next Big Thing for B2B? Shoomon Perry, March 2001 © 2001 Sixhills Consulting Ltd & Author Why are B2B Exchanges Becoming Involved in Derivatives? Derivatives represent a “value added service” that can be intermediated by a B2B exchange. Furthermore verticals and conventional derivative exchanges have complementary skill sets with respect to running a set of exchange traded derivative products. In contrast, there are fewer reasons for an OTC market-maker like Enron to partner with a B2B exchange. Instead we are seeing in weather and shipping attempts to create a neutral marketplace for multiple OTC market-makers. Derivative Capabilities of the Different Players Type of player Industry Expertise Derivative Expertise Trading Technology Existing Customer Relationships Derivative Exchange Weak Strong Strong Relationships with speculators and not users B2B Exchange Strong Weak No derivative exchange platform Customers of B2B Exchange represent potential hedgers OTC Market Maker Strong Strong Variable Set of relationships with industry hedgers What is Driving the Creation of New Derivative Contracts? Some of the initiatives announced above involve the creation of derivatives in completely new sectors. The key factors are increasing commoditisation and better data. Growing Commoditisation Greater competition (often caused by deregulation) has driven further product standardisation and price transparency. Given the choice, purchasers are less willing to enter into long term contracts if it results in less competitive pressure on prices. Consequently there is a desire to separate out provision from price risk management.
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