Financial markets

Kimmo Soramäki and Samantha Cook

The term “financial market” refers to a venue (electronic or physical) where trading of financial instruments takes place. Financial instruments are defined by the International Accounting Standards as “any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity”. Examples include stocks, bonds, commodities, repos, options, forwards, futures, swaps and foreign exchange. Financial markets can be divided based on the market structure into two broad categories: decentralised and centralised. Decentralised market structure is characteristic of over-the-counter (bilateral) markets, while in centralised markets all the transactions are cleared by a central clearing house (see Figure 14.1).


Over-the-counter (OTC) markets are decentralised, meaning that market participants transact directly with one another. Since the defining characteristic of OTC markets is that transactions take place directly between two counterparties, OTC markets are also referred to as bilateral markets. Trading of currencies and bonds is mainly done over-the-counter. Also, bespoke derivatives contracts with non-standard terms

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