The Limitations of Transparency Policy in OTC Markets and Derivatives Trading

Abstract

After each financial failure related to Over the Counter (OTC) markets and derivatives trading, one may observe the call of more transparency for market participants. During the global financial crisis, there was a growing expectation of a better disclosure framework for OTC markets and derivatives trading. More specifically, some believe that a better disclosure framework for OTC markets and derivatives may help to improve both efficiency/stability in the marketplace and investor protection. From the financial firm/system-wide risk management perspective, it is argued that more transparency in OTC markets and derivatives trading may help to improve firm/system-wide risk management by enhancing self, official and market disciplines. In this paper, the author aims to analyze the importance and limitations of the transparency policy by analyzing transparency literature in banking. By using the ideas in banking and the global financial crisis lessons, the author attempts to define limitations of the policy of more transparency in OTC market/derivatives trading. The paper is specifically aimed at analyzing the potential problems of OTC market/derivatives trading in the case of sophisticated financial markets, and attempts to provide a brief from an emerging markets’ perspective. In the light of the literature review and discussions, it is concluded that more transparency in OTC markets and derivatives trading may not necessarily mean a better marketplace, due to clear, inherent limitations of the mechanism.

Keywords: OTC markets, derivatives trading, transparency, market discipline

JEL Classification: G01, G21, G32