Making OTC Derivatives Safe - A Fresh Look

23 Pages Posted: 28 Mar 2011

See all articles by Manmohan Singh

Manmohan Singh

International Monetary Fund (IMF)

Date Written: March 2011

Abstract

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.

Keywords: Bankruptcy, Capital markets, Credit risk, Financial institutions, Financial instruments, Risk management

Suggested Citation

Singh, Manmohan, Making OTC Derivatives Safe - A Fresh Look (March 2011). IMF Working Paper No. 11/66, Available at SSRN: https://ssrn.com/abstract=1795845

Manmohan Singh (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

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