Market Structure and Regulatory Landscape of OTC Derivatives

Kishore Kumar R, Consultant, Domain Competency Group, Infosys Technologies Limited, Lakshmi Narasimhan S, Consultant, Domain Competency Group, Infosys Technologies Limited

Abstract

In recent years, various reports and articles have surfaced that outline the implications of the very rapid growth of over-the-counter (OTC) derivatives activities in terms of risks to banks and other counterparties. Significant work has proceeded at an international level towards consensus on a high-level framework for regulating the OTC derivatives market. The appropriate level of regulation in the OTC derivatives market should prima facie address the two important economic functions that they serve: price discovery and risk shifting (also referred to as hedging or risk management). This paper attempts to examine the structural elements of the high level regulatory framework that help achieve the identified common goals for protection of customers; fair, efficient and transparent markets; and reduction of systemic risk.