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Policy Perspectives on OTC Derivatives Market Infrastructure

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Author Info

  • Darrell Duffie

    (Stanford University Graduate School of Business)

  • Ada Li

    (Federal Reserve Bank of New York)

  • Theo Lubke

    (Federal Reserve Bank of New York)

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    Abstract

    In the wake of the recent financial crisis, over-the-counter (OTC) derivatives have been blamed for increasing systemic risk. Although OTC derivatives were not a central cause of the crisis, the complexity and limited transparency of the market reinforced the potential for excessive risk-taking, as regulators did not have a clear view into how OTC derivatives were being used. We discuss how the New York Fed and other regulators could improve weaknesses in the OTC derivatives market through stronger oversight and better regulatory incentives for infrastructure improvements to reduce counterparty credit risk and bolster market liquidity, efficiency, and transparency. Used responsibly with these reforms, over-the-counter derivatives can provide important risk management and liquidity benefits to the financial system.

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    File URL: http://econresearch.uchicago.edu/sites/econresearch.uchicago.edu/files/BFI_2010-002.pdf
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    Bibliographic Info

    Paper provided by Becker Friedman Institute for Research In Economics in its series Working Papers with number 2010-002.

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    Date of creation: 2010
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    Handle: RePEc:bfi:wpaper:2010-002

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    Web page: http://bfi.uchicago.edu/
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    Related research

    Keywords: OTC derivatives; central counterparty; centralized data repository; collateral management; electronic trading platform; exchange; market transparency; regulation; systemic risk;

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    Cited by:
    1. Awrey, Dan, 2013. "Toward a supply-side theory of financial innovation," Journal of Comparative Economics, Elsevier, vol. 41(2), pages 401-419.
    2. Patricia C. Mosser & Joseph Tracy & Joshua Wright, 2013. "The capital structure and governance of a mortgage securitization utility," Staff Reports 644, Federal Reserve Bank of New York.
    3. Qiu, Jiaping & Yu, Fan, 2012. "Endogenous liquidity in credit derivatives," Journal of Financial Economics, Elsevier, vol. 103(3), pages 611-631.
    4. Neuner, Stefan & Schäfer, Klaus, 2011. "Zentrale Gegenparteien für den außerbörslichen Derivatehandel in der Praxis," Bayreuth Working Papers on Finance, Accounting and Taxation (FAcT-Papers) 2011-02, University of Bayreuth, Chair of Finance and Banking.
    5. Jorge Cruz Lopez & Jeffrey Harris & Christophe Hurlin & Christophe Pérignon, 2014. "CoMargin," Working Papers halshs-00979440, HAL.
    6. Gunther Capelle-Blancard, 2010. "Are derivatives dangerous?," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00605908, HAL.
    7. Markose, Sheri & Giansante, Simone & Shaghaghi, Ali Rais, 2012. "‘Too interconnected to fail’ financial network of US CDS market: Topological fragility and systemic risk," Journal of Economic Behavior & Organization, Elsevier, vol. 83(3), pages 627-646.

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