Derivative Market Competition: OTC Versus Organized Derivative Exchanges

April 1, 2004

Preview Citation

Format: Chicago

Jens Nystedt. Derivative Market Competition: OTC Versus Organized Derivative Exchanges, (USA: International Monetary Fund, 2004) accessed November 23, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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.

Subject: Competition, Credit risk, Derivative markets, Financial markets, Financial regulation and supervision, Hedging, Over-the-counter markets

Keywords: Competition, Competition dimension, Credit risk, Derivative market competition, Derivative markets, Financial market, Global, Hedging, Maximization problem, ODE derivative market, ODE market, OTC contract, OTC derivative, OTC market, Over-the-counter markets, Regulatory reform, Security design, Transaction cost, WP

Publication Details

Pages:

48
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2004/061
Stock No:

WPIEA0612004
ISBN:

9781451848205
ISSN:

1018-5941

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