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The structure of derivatives exchanges : lessons from developed and emerging markets

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  • Tsetsekos, George
  • Varangis, Panos
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    Abstract

    The authors examine the architecture, elements of market design, and the products traded in derivatives exchanges around the world. The core function of a derivatives exchange is to facilitate the transfer of risk among economic agents by providing mechanisms to enhance liquidity and facilitate price discovery. They test the proposition that organizational arrangements necessary to perform this function are not the same across markets. They also examine the sequencing of products introduced in derivatives exchanges. Using a survey instrument, they find that: a) Financial systems perform the same core functions across time and place but institutional arrangements differ. b) The ownership structure of derivatives exchanges assumes different forms across markets. c) The success of an exchange depends on the structure adopted and the products traded. d) Exchanges are regulated directly or indirectly through a government law. In addition, exchanges have their own regulatory structure. e) Typically (but not always) market-making systems are based on open outcry, with daily mark-to-market and gross margining -- but electronic systems are gaining popularity. f) Several (but not all) exchanges own clearing facilities and use netting settlement procedures. As for derivative products traded, they find that: i) Although most of the older exchanges started with (mainly agricultural) commodity derivatives, newer exchanges first introduce financial derivative products. ii) Derivatives based on a domestic stock index have greater potential for success followed by derivatives based on local interest rates and currencies. iii) The introduction of derivatives contracts appears to take more time in emerging markets compared with developed markets, with the exception of index products.

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    Bibliographic Info

    Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1887.

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    Date of creation: 28 Feb 1998
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    Handle: RePEc:wbk:wbrwps:1887

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    Keywords: Economic Theory&Research; Payment Systems&Infrastructure; International Terrorism&Counterterrorism; Non Bank Financial Institutions; Environmental Economics&Policies; International Terrorism&Counterterrorism; Payment Systems&Infrastructure; Economic Theory&Research; Non Bank Financial Institutions; Environmental Economics&Policies;

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    1. Craig, Alastair & Dravid, Ajay & Richardson, Matthew, 1995. "Market efficiency around the clock Some supporting evidence using foreign-based derivatives," Journal of Financial Economics, Elsevier, Elsevier, vol. 39(2-3), pages 161-180.
    2. Avi Bick., 1982. "Comments on the Valuation of Derivative Assets," Research Program in Finance Working Papers, University of California at Berkeley 125, University of California at Berkeley.
    3. Louis O. Scott, 1992. "The Information Content of Prices in Derivative Security Markets," IMF Staff Papers, Palgrave Macmillan, vol. 39(3), pages 596-625, September.
    4. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, Elsevier, vol. 3(4), pages 305-360, October.
    5. Bernard Bensaid & Jean-Philippe Lesne & Henri Pagès & José Scheinkman, 1992. "Derivative Asset Pricing With Transaction Costs," Mathematical Finance, Wiley Blackwell, Wiley Blackwell, vol. 2(2), pages 63-86.
    6. Gerard Gennotte and Hayne Leland., 1991. "Low Margins, Derivative Securities, and Volatility," Research Program in Finance Working Papers, University of California at Berkeley RPF-211, University of California at Berkeley.
    7. Lee, Byung-Joo, 1994. "Non-parametric test of derivative restrictions robust to functional misspecification," Economics Letters, Elsevier, Elsevier, vol. 45(2), pages 131-136, June.
    8. Michael C. Jensen & William H. Heckling, 1995. "Specific And General Knowledge, And Organizational Structure," Journal of Applied Corporate Finance, Morgan Stanley, Morgan Stanley, vol. 8(2), pages 4-18.
    9. Eli M. Remolona, 1992. "The recent growth of financial derivative markets," Quarterly Review, Federal Reserve Bank of New York, Federal Reserve Bank of New York, issue Win, pages 28-43.
    10. Bick, Avi, 1982. "Comments on the valuation of derivative assets," Journal of Financial Economics, Elsevier, Elsevier, vol. 10(3), pages 331-345, November.
    11. Domowitz, Ian, 1995. "Electronic derivatives exchanges: Implicit mergers, network externalities, and standardization," The Quarterly Review of Economics and Finance, Elsevier, Elsevier, vol. 35(2), pages 163-175.
    12. Ludger Hentschel & Clifford W. Smith, 1994. "Risk And Regulation In Derivatives Markets," Journal of Applied Corporate Finance, Morgan Stanley, Morgan Stanley, vol. 7(3), pages 8-22.
    13. Darryll Hendricks, 1994. "Netting agreements and the credit exposures of OTC derivatives portfolios," Quarterly Review, Federal Reserve Bank of New York, Federal Reserve Bank of New York, issue Spr, pages 7-18.
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    Cited by:
    1. Tsetsekos, George & Varangis, Panos, 2000. "Lessons in Structuring Derivatives Exchanges," World Bank Research Observer, World Bank Group, World Bank Group, vol. 15(1), pages 85-98, February.

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