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Shaping Reforms and Business Models for the OTC Derivatives Market: Quo vadis? ECMI Research Report No. 5, 15 April 2010

Valiante, Diego. (2010) Shaping Reforms and Business Models for the OTC Derivatives Market: Quo vadis? ECMI Research Report No. 5, 15 April 2010. UNSPECIFIED.

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    Abstract

    Now that the worst of the financial storm is over, regulators are setting new strategies to deal with the systemic importance of the €427 trillion ($604 trillion) over-the-counter (OTC) derivatives market. This paper explores the three major sources of disruptive effects in OTC derivatives: liquidity, counterparty risk and legal uncertainty. These risks affect the value chain of a typical derivative transaction and weaken the economic and legal rationale behind their widespread use. On the policy side, commitments have been made at G-20 level to draft uniform rules on a global scale “to build a safer financial system”. This paper finds, however, that in practice, the EU and US proposals lay out divergent roads to meet common objectives and the author warns that such divergences may encourage regulatory and supervisory arbitrage. Policy options currently under discussion may need further revision. For instance, access to network clearing infrastructures, such as CCPs, can only be made available to a restricted group of eligible derivative products. Mechanisms of adverse selection and moral hazard, then, may at any time affect the efficient functioning of these crucial infrastructures for financial markets.

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    Item Type: Other
    Uncontrolled Keywords: OTC derivatives; central counterparty clearing (CCP); data repositories; collateral management; electronic trading platform; exchange; market transparency; systemic risk; financial and securities regulation; corporate finance; capital markets; financial crisis.
    Subjects for non-EU documents: EU policies and themes > Policies & related activities > economic and financial affairs > financial crisis 2008-on and consequences/reforms
    EU policies and themes > Policies & related activities > economic and financial affairs > Single Market > capital, goods, services, workers
    EU policies and themes > Policies & related activities > regulations/regulatory policies
    Subjects for EU documents: UNSPECIFIED
    EU Series and Periodicals: UNSPECIFIED
    EU Annual Reports: UNSPECIFIED
    Series: Series > Centre for European Policy Studies (Brussels) > ECMI Research Reports
    Depositing User: Phil Wilkin
    Official EU Document: No
    Language: English
    Date Deposited: 03 Aug 2010
    Page Range: p. 60
    Last Modified: 15 Feb 2011 18:33
    URI: http://aei.pitt.edu/id/eprint/14437

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