OTC derivatives: financial stability challenges and responses from authorities.

Abstract

The importance of well-functioning over-the-counter (OTC) derivatives markets for fi nancial stability was highlighted during the financial market turmoil, when significant shortcomings in risk management and market transparency were exposed. In response to these experiences, public authorities have launched a series of measures to strengthen OTC derivatives markets. This article provides an overview of this work. It explains the significance of well-functioning OTC derivatives markets and discusses the main lessons from the financial crisis regarding the need to strengthen their resiliency and transparency. Then, we describe the main tools under consideration, relating to the use of sound market infrastructures – central counterparties and trade repositories –, enhanced bilateral risk management as well as to cooperation between regulators and overseers of infrastructures and banking supervisors. We finally describe the state of play of the main initiatives within these areas.