EUREX: The Global Derivatives Market - A Blueprint for Market Safety and Integrity
07 September 2009
There is evident need to reform unregulated parts of the derivatives market.
Derivatives contribute to economic growth and increase the efficiency of markets by improving price discovery for assets. Nevertheless, the derivatives market has certainly been affected by, and has played a significant role in, recent market turbulence.
This was inevitable for two main reasons:
· first, its sheer size: €471 trillion in notional amount outstanding and a gross market value of €24 trillion as of December 2008; and
· second, the relevance of derivatives for the global financial system. In the course of the crisis major market participants have reached the brink of default or failed, and have generated unprecedented oscillations in market volatility.
As market participants in the OTC derivatives market segment are highly interconnected, defaults of system-relevant market participants could have caused disruption within the whole financial system.
In order to minimize this systemic risk and create a well-functioning market both safety and integrity need to be ensured. As such, a blueprint that effectively reduces the systemic risk in the derivatives market should incorporate the following guidelines:
· Maximum use of derivatives trading in organized markets
· Maximum use of central counterparties where trading in organized markets is not feasible
· Bilateral collateralization of derivatives exposure (preferably handled by a third party) when organized trading or the use of CCPs is not feasible
· Mandatory registration of open risk positions and reporting standards for all derivative contracts
A joint effort by market participants, infrastructure providers and regulators is required to strive for a swift and consistent implementation of the blueprint in order to restore and sustainably strengthen market safety and integrity.
© Eurex
