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The new OTC derivatives landscape: (more) transparency, liquidity, and electronic trading

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  • Cristiano Zazzara

    (S&P Global Market Intelligence)

Abstract

Inspired by recent papers of Hull (Financ Stab Rev 14(July):71–80, 2010; J Deriv 20(1 (Fall)):26–29, 2012; J Financ Eng 1(3 (September)):1–8, 2014) on the topic, this note provides an overview of the OTC derivatives reform proposed by the G20 leaders in September 2009 as a response to the recent subprime crisis. The goal is to describe the major different legislations approved, and in some cases implemented, around the world (with a particular focus on US and Europe), and how this structural change in the OTC derivatives market will affect the way financial and non-financial firms operate. The main takeaway of this note is the (evolving) regulatory landscape will definitely push for the standardization of OTC products over time, implying a more transparent, liquid, and simpler OTC derivatives market. However, bespoke OTCs will still play a significant role in the market, simply because plain vanilla OTC instruments and exchange-traded derivatives (Futures, for example) are less suitable for hedging purposes. The structure of the OTC derivatives market will change in the next years. Firms around the world should be prepared to navigate a fast moving market and regulatory landscape.

Suggested Citation

  • Cristiano Zazzara, 2020. "The new OTC derivatives landscape: (more) transparency, liquidity, and electronic trading," Journal of Banking Regulation, Palgrave Macmillan, vol. 21(2), pages 170-187, June.
    • Handle: RePEc:pal:jbkreg:v:21:y:2020:i:2:d:10.1057_s41261-019-00105-0
    DOI: 10.1057/s41261-019-00105-0
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    References listed on IDEAS

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    1. Ghamami, Samim & Glasserman, Paul, 2017. "Does OTC derivatives reform incentivize central clearing?," Journal of Financial Intermediation, Elsevier, vol. 32(C), pages 76-87.
    2. John Hull, 2014. "The changing landscape for derivatives," Journal of Financial Engineering (JFE), World Scientific Publishing Co. Pte. Ltd., vol. 1(03), pages 1-8.
    3. Dalla Fontana, Silvia & Holz auf der Heide, Marco & Pelizzon, Loriana & Scheicher, Martin, 2019. "The anatomy of the euro area interest rate swap market," Working Paper Series 2242, European Central Bank.
    4. Hull, J., 2010. "OTC derivatives and central clearing: can all transactions be cleared?," Financial Stability Review, Banque de France, issue 14, pages 71-78, July.
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    More about this item

    Keywords

    OTC derivatives; Dodd–Frank; EMIR; MiFID 2/MIFIR; Basel 3; CRD IV/CRR; Central clearing; Trade repositories; Electronification; Margin;
    All these keywords.

    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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