Derivative Market Competition: OTC Versus Organized Derivative Exchanges

Jens Nystedt

No 2004/061, IMF Working Papers from International Monetary Fund

Abstract: Recent regulatory initiatives in the United States have again raised the issue of a 'level regulatory and supervisory playing field' and the degree of competition globally between over-the-counter (OTC) derivatives and organized derivative exchange (ODE) markets. This paper models some important aspects of how an ODE market interrelates with the OTC markets. It analyzes various ways in which an ODE market can respond to competition from the OTC markets and considers whether ODE markets would actually benefit from a more level playing field. Among other factors, such as different transaction costs, different abilities to mitigate credit risk play a significant role in determining the degree of competition between the two types of markets. This implies that a potentially important service ODE markets can provide OTC market participants is to extend clearing services to them. Such services would allow the OTC markets to focus more on providing less competitive contracts/innovations and instead customize its contracts to specific investors' risk preferences and needs.

Keywords: WP; OTC market; ODE market; financial market; OTC contract; Derivative market competition; security design; regulatory reform; OTC derivative; transaction cost; competition dimension; ODE derivative market; maximization problem; Over-the-counter markets; Hedging; Credit risk; Competition; Derivative markets; Global (search for similar items in EconPapers)
Pages: 48
Date: 2004-04-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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