Making OTC Derivatives Safe

Making OTC Derivatives Safe—A Fresh Look

March 1, 2011

Preview Citation

Format: Chicago

Manmohan Singh. Making OTC Derivatives Safe—A Fresh Look, (USA: International Monetary Fund, 2011) accessed November 21, 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 efforts, especially in the U.S. and Europe, are aimed at reducing moral hazard so that the next financial crisis is not bailed out by tax payers. This paper looks at the possibility that central counterparties (CCPs) may be too-big-to-fail entities in the making. The present regulatory and reform efforts may not remove the systemic risk from OTC derivatives but rather shift them from banks to CCPs. Under the present regulatory overhaul, the OTC derivative market could become more fragmented. Furthermore, another taxpayer bailout cannot be ruled out. A reexamination of the two key issues of (i) the interoperability of CCPs, and (ii) the cost of moving to CCPs with access to central bank funding, indicates that the proposed changes may not provide the best solution. The paper suggests that a tax on derivative liabilities could make the OTC derivatives market safer, particularly in the transition to a stable clearing infrastructure. It also suggests reconsideration of a "public utility" model for the OTC market infrastructure.

Subject: Banking, Central counterparty clearing house, Collateral, Systemic risk, Systemically important financial institutions

Keywords: Central counterparty, Derivative, OTC, OTC derivative, SIFIs Will Offload Most, WP

Publication Details

Pages:

22
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2011/066
Stock No:

WPIEA2011066
ISBN:

9781455228041
ISSN:

1018-5941

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