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Derivative Market Competition

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  • Jens Nystedt
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    Abstract

    Recent regulatory initiatives in the United States have again raised the issue of a ''''level regulatory and supervisory playing field'''' and the degree of competition globally between over-the-counter (OTC) derivatives and organized derivative exchange (ODE) markets. This paper models some important aspects of how an ODE market interrelates with the OTC markets. It analyzes various ways in which an ODE market can respond to competition from the OTC markets and considers whether ODE markets would actually benefit from a more level playing field. Among other factors, such as different transaction costs, different abilities to mitigate credit risk play a significant role in determining the degree of competition between the two types of markets. This implies that a potentially important service ODE markets can provide OTC market participants is to extend clearing services to them. Such services would allow the OTC markets to focus more on providing less competitive contracts/innovations and instead customize its contracts to specific investors'' risk preferences and needs.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 04/61.

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    Length: 48
    Date of creation: 01 Apr 2004
    Date of revision:
    Handle: RePEc:imf:imfwpa:04/61

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    Related research

    Keywords: Securities regulations; Economic models; investors; derivative markets; risk exposure; commodity futures; otc transactions; regulatory reform; short sales; risk preference; institutional investors; international finance; regulatory action; expected value; commercial banks; global trading;

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    References

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    1. Randall S. Kroszner, 1999. "Can the Financial Markets Privately Regulate Risk? The Development of Derivatives Clearing Houses and Recent Over-the Counter Innovations," CRSP working papers 493, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
    2. Tano Santos & José A. Scheinkman, 2000. "Competition Among Exchanges," CRSP working papers 514, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
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    Cited by:
    1. Meeus, Leonardo, 2011. "Why (and how) to regulate power exchanges in the EU market integration context?," Energy Policy, Elsevier, vol. 39(3), pages 1470-1475, March.

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