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Policy Perspectives on OTC Derivatives Market Infrastructure

Author

Listed:
  • Darrell Duffie

    (Stanford University Graduate School of Business)

  • Ada Li

    (Federal Reserve Bank of New York)

  • Theo Lubke

    (Federal Reserve Bank of New York)

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.

Suggested Citation

  • Darrell Duffie & Ada Li & Theo Lubke, 2010. "Policy Perspectives on OTC Derivatives Market Infrastructure," Working Papers 2010-002, Becker Friedman Institute for Research In Economics.
  • Handle: RePEc:bfi:wpaper:2010-002
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    File URL: https://econresearch.uchicago.edu/sites/econresearch.uchicago.edu/files/BFI_2010-002.pdf
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    Cited by:

    1. repec:kap:annfin:v:13:y:2017:i:4:d:10.1007_s10436-017-0308-x is not listed on IDEAS
    2. Benos, Evangelos & Wetherilt, Anne & Zikes, Filip, 2013. "Financial Stability Paper No 25: The structure and dynamics of the UK CDS market," Bank of England Financial Stability Papers 25, Bank of England.
    3. repec:eee:finmar:v:36:y:2017:i:c:p:91-114 is not listed on IDEAS
    4. Ruffini, Ivana & Steigerwald, Robert, 2014. "OTC Derivatives—A Primer on Market Infrastructure and Regulatory Policy," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q III, pages 80-99.
    5. Hau, Harald & Hoffmann, Peter & Langfield, Sam & Timmer, Yannick, 2017. "Discriminatory Pricing of Over-The-Counter Derivatives," CEPR Discussion Papers 12525, C.E.P.R. Discussion Papers.
    6. 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.
    7. Qiu, Jiaping & Yu, Fan, 2012. "Endogenous liquidity in credit derivatives," Journal of Financial Economics, Elsevier, vol. 103(3), pages 611-631.
    8. repec:cup:jfinqa:v:52:y:2017:i:05:p:2183-2215_00 is not listed on IDEAS
    9. repec:oup:rasset:v:1:y:2011:i:1:p:74-95. is not listed on IDEAS
    10. repec:wsi:ijfexx:v:02:y:2015:i:02:n:s2424786315500115 is not listed on IDEAS
    11. Awrey, Dan, 2013. "Toward a supply-side theory of financial innovation," Journal of Comparative Economics, Elsevier, vol. 41(2), pages 401-419.
    12. 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.
    13. Michele Bonollo & Irene Crimaldi & Andrea Flori & Laura Gianfagna & Fabio Pammolli, 2016. "Assessing financial distress dependencies in OTC markets: a new approach using trade repositories data," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 30(4), pages 397-426, November.
    14. repec:eee:jfinin:v:32:y:2017:i:c:p:76-87 is not listed on IDEAS
    15. Gunther Capelle-Blancard, 2010. "Are derivatives dangerous?," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00605908, HAL.
    16. 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.
    17. Thapa, Chandra & Neupane, Suman & Marshall, Andrew, 2016. "Market liquidity risks of foreign exchange derivatives and cross-country equity portfolio allocations," Journal of Multinational Financial Management, Elsevier, vol. 34(C), pages 46-64.
    18. Cruz Lopez, Jorge A. & Harris, Jeffrey H. & Hurlin, Christophe & Pérignon, Christophe, 2017. "CoMargin," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 52(05), pages 2183-2215, October.
      • Jorge Cruz Lopez & Jeffrey Harris & Christophe Hurlin & Christophe Pérignon, 2015. "CoMargin," Working Papers halshs-00979440, HAL.

    More about this item

    Keywords

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

    JEL classification:

    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • G01 - Financial Economics - - General - - - Financial Crises
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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