Federal Reserve Bank of New York Staff Reports Policy Perspectives on OTC Derivatives Market Infrastructure Staff Report No. 424

28 Pages Posted: 11 Jan 2010

See all articles by Darrell Duffie

Darrell Duffie

Stanford University - Graduate School of Business; National Bureau of Economic Research (NBER); Canadian Derivatives Institute

Ada Li

affiliation not provided to SSRN

Theodore Lubke

affiliation not provided to SSRN

Date Written: January 1, 2010

Abstract

In the wake of the recent financial crisis, over-the-counter (OTC) derivatives have been blamed for increasing systemic risk. Although OTC derivatives were not a central cause of the crisis, the complexity and limited transparency of the market reinforced the potential for excessive risk-taking, as regulators did not have a clear view into how OTC derivatives were being used. We discuss how the New York Fed and other regulators could improve weaknesses in the OTC derivatives market through stronger oversight and better regulatory incentives for infrastructure improvements to reduce counterparty credit risk and bolster market liquidity, efficiency, and transparency. Used responsibly with these reforms, over-the-counter derivatives can provide important risk management and liquidity benefits to the financial system.

Keywords: OTC derivatives, central counterparty, centralized data repository, collateral management, electronic trading platform, exchange, market transparency, regulation, systemic risk

JEL Classification: G10, G14, G18, G28, G38

Suggested Citation

Duffie, James Darrell and Li, Ada and Lubke, Theodore, Federal Reserve Bank of New York Staff Reports Policy Perspectives on OTC Derivatives Market Infrastructure Staff Report No. 424 (January 1, 2010). Rock Center for Corporate Governance at Stanford University Working Paper No. 70, Available at SSRN: https://ssrn.com/abstract=1534874 or http://dx.doi.org/10.2139/ssrn.1534874

James Darrell Duffie (Contact Author)

Stanford University - Graduate School of Business ( email )

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National Bureau of Economic Research (NBER)

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Canadian Derivatives Institute ( email )

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Ada Li

affiliation not provided to SSRN ( email )

Theodore Lubke

affiliation not provided to SSRN ( email )

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