Journal of Financial Market Infrastructures

Risk.net

Making the over-the-counter derivatives markets safe: a fresh look

Manmohan Singh

ABSTRACT

In the aftermath of the failure of Lehman Brothers, regulators, especially in the United States and Europe, are focusing on reducing the risks in the overall ove-rthe-counter (OTC) derivatives market. We provide an overview of the OTC derivatives market and the associated drawbacks in the proposed regulatory initiatives that continue to unfold. We propose an alternative that would make this market safe with relatively few additional collateral costs. Since many OTC derivative users will be exempt from posting collateral, we suggest an appropriate levy on derivative risk at large banks as a more transparent approach than moving OTC derivatives to central counterparties (CCPs).

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