European Market Infrastructure Regulation
CCPs: Central Clearing of OTC Derivatives
Banks: The Impact of New Regulation
Hedge Funds: Risk Management in an Illiquid World
Insurers: Liability-driven Investing for Insurers
Counterparty Risk Management
Collateral: Transformation & Optimisation
Many Organisation for Economic Cooperation and Development (OECD) sovereigns use over-the-counter (OTC) derivatives in their debt management activities. This chapter will present a simple framework to analyse the implications of the OTC derivatives regulatory reforms and debt management office (DMO) OTC development policies.
THE USE OF DERIVATIVES BY DEBT MANAGEMENT OFFICES
A survey among 33 OECD DMOs in the post-2008 crisis period revealed that:
- most DMOs use derivatives, and a significant percentage intend to continue using them in the future; in fact, there are indications that a growing number of DMOs are planning to use these instruments; and
- interest rate swaps (IRS) and cross-currency swaps (CCS) were by far the most commonly used instruments.
Why use derivatives?
There are three key reasons for the use of derivatives among sovereigns. First, a significant reason for the frequent and common use of IRS is their importance for domestic portfolio management; for example, countries that have duration targets tend to use derivatives. The frequent use of IRS is also associated with a higher ratio of domestic (currency) debt to total debt in the portfolios o