OTC Derivatives Flashcards
1
Q
Deficiencies OTC derivatives
A
- Lack of transparency, opaqueness
- Significant counter party risk
- OTC derivatives prices have no market references, calculated internally
- relatively illiquid
- Valued by internal parameters, hence increased the difficulty involved in assessing true value or risk exposure by regulators
- It is a risk accumulating tool, because you can not stop speculators building up systemic risk
- The issue is recognised but has not been implemented fast enough like capital reserve requirement area
2
Q
Why we need OTC derivatives?
A
- It is risk spreading tool, it allows to transfer risk for whoever can afford ( through hedging)
- OTC are highly customised and specifically tailored for certain risks that are can not be covered through standardised contracts, ie risk management is not a standardised issue therefore cannot be managed through standardised contracts. Natural hedgers dont wish to bear the capital cost increase caused by speculators
3
Q
Potential Improvements on OTC derivative area
A
- Simplification of which the way of derivative transactions are done and increase the transparency.
Ex: requirements of trading reports: AIG - Creating a regulatory condition by incentivising any financial institutions which are holding derivatives from CCP instead of OTC, by allowing less capital to hold against CCP derivatives