Policy Perspectives on OTC Derivatives Market Infrastructure

30 Pages Posted: 12 Jan 2010 Last revised: 9 Mar 2010

See all articles by Darrell Duffie

Darrell Duffie

Stanford University - Graduate School of Business; National Bureau of Economic Research (NBER)

Ada Li

Federal Reserve Banks - Federal Reserve Bank of New York

Theodore Lubke

affiliation not provided to SSRN

Multiple version iconThere are 2 versions of this paper

Date Written: March 2010

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.

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

JEL Classification: E61, G01, G10, G18

Suggested Citation

Duffie, James Darrell and Li, Ada and Lubke, Theodore, Policy Perspectives on OTC Derivatives Market Infrastructure (March 2010). Available at SSRN: https://ssrn.com/abstract=1534729 or http://dx.doi.org/10.2139/ssrn.1534729

James Darrell Duffie

Stanford University - Graduate School of Business ( email )

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National Bureau of Economic Research (NBER)

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Ada Li

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

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United States

Theodore Lubke (Contact Author)

affiliation not provided to SSRN ( email )

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