Fallacy of moving the OTC derivatives market to CCPs

Manmohan Singh

Journal of Risk Management in Financial Institutions, 2012, vol. 5, issue 3, 314-318

Abstract: Recent regulatory efforts, especially in the USA and Europe, are aimed at reducing moral hazard so that the next financial crisis is not bailed out by tax payers. This paper suggests that the regulatory proposals may not remove systemic risk from over-the-counter (OTC) derivatives but rather shift it from banks to central counterparties (CCPs). Furthermore, another taxpayer bailout cannot be ruled out. This paper also suggests that a tax on the derivative liabilities of large banks would address the source of the problem (ie under-collateralisation), and make the OTC derivatives market safer. We also show that, as a by-product, this suggestion would lower CDS spreads in distressed sovereigns.

Keywords: collateral; CCP; interoperability; netting; over-the-counter derivatives; rehypothecation (search for similar items in EconPapers)
JEL-codes: E5 G2 (search for similar items in EconPapers)
Date: 2012
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Persistent link: https://EconPapers.repec.org/RePEc:aza:rmfi00:y:2012:v:5:i:3:p:314-318

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