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


  • Tsetsekos, George
  • Varangis, Panos


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.

Suggested Citation

  • Tsetsekos, George & Varangis, Panos, 1998. "The structure of derivatives exchanges : lessons from developed and emerging markets," Policy Research Working Paper Series 1887, The World Bank.
  • Handle: RePEc:wbk:wbrwps:1887

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    References listed on IDEAS

    1. Darryll Hendricks, 1994. "Netting agreements and the credit exposures of OTC derivatives portfolios," Quarterly Review, Federal Reserve Bank of New York, issue Spr, pages 7-18.
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    4. Gerard Gennotte and Hayne Leland., 1991. "Low Margins, Derivative Securities, and Volatility," Research Program in Finance Working Papers RPF-211, University of California at Berkeley.
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    8. Avi Bick., 1982. "Comments on the Valuation of Derivative Assets," Research Program in Finance Working Papers 125, University of California at Berkeley.
    9. Bernard Bensaid & Jean-Philippe Lesne & Henri Pagès & José Scheinkman, 1992. "Derivative Asset Pricing With Transaction Costs," Mathematical Finance, Wiley Blackwell, vol. 2(2), pages 63-86.
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    Cited by:

    1. Tsetsekos, George & Varangis, Panos, 2000. "Lessons in Structuring Derivatives Exchanges," World Bank Research Observer, World Bank Group, vol. 15(1), pages 85-98, February.


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