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Current volatility of the gross market values and gross credit exposures can be attributed to the uncertain market conditions for the global economy. Distribution of derivatives instruments has remained relatively constant over the past decade. Central clearing and portfolio compression is developing fast for interest rate and credit derivatives, while progress in other asset classes is fairly slow. The OTC derivatives market is structured with a highly interconnected system of financial institutions. But composition is changing from a dealer-driven business to a more diversified environment, with other financial institutions (such as CCPs and investment funds) playing a greater role. Uncollateralised exposure is estimated in constant decline as a result of better collateralization of OTC derivatives exposures, either through bilateral collateral agreements or the use of CCPs, and improvement of market conditions.
A structural shift of OTC derivatives to organised trading platforms is still not happening. Despite high volumes of on-exchange commodity derivatives and increasing volumes of interest rate derivatives traded on organized platforms, the market for OTC derivatives continues to be bigger than the exchange-traded side of the market, but the situation may rapidly change as the trading obligations gradually enter into force across key jurisdictions.
It is too early to conduct a comprehensive assessment of the effectiveness of the regulatory reforms in meeting the G-20’s underlying objectives of increasing transparency, mitigating systemic risk and protecting against market abuse in the OTC derivatives market. The benefits and costs of the underway reforms will largely depend on how these will interact with derivatives portfolios and affect the structure of the derivatives market more broadly. There are multiple factors that may influence the impact of OTC regulatory reforms, such as the netting efficiency, collateral availability, market liquidity, exposures fragmentation, margining pro-cyclicality and market volatility, safeguards for CCPs, changes in hedging practices and risk-taking behavior and cross-border regulation.