This report presents the main findings of this work, relating to
(i) general market characteristics,
(ii) the size and location of the market,
(iii) post-trading infrastructures and market arrangements, and
(iv) possible policy implications. The report discusses the different product characteristics, the main market participants and the corresponding systemic risk implications.
It highlights the fact that OTC derivatives are of systemic relevance particularly because of the large risk exposures of a small number of major financial institutions. In addition, the inherent opacity of OTC derivatives markets and the limited development of post-trading infrastructures hamper effective risk management and market discipline. As a result, major initiatives are currently under way to improve the safety, efficiency and resilience of OTC derivatives markets.
The size of the OTC derivatives market has significantly increased during the past decade.
While the implied payment fl ows vary depending on the particular product specification, and in general represent a small fraction of the market, they are still substantial. Moreover, although market volumes have recently declined, namely as a result of portfolio compression efforts, this has not been the case for the payment flows at risk, which have actually increased. The euro-denominated share of OTC derivatives markets is very substantial, with the euro being either the most important or the second most important currency in all fi ve markets under consideration. Furthermore, while only limited information on geographical counterparty breakdowns is available, the existing evidence suggests that euro area counterparties play an important role in the business.
Although the majority of transactions in the OTC derivatives market are still traded, cleared and settled bilaterally, a number of clearing the markets under consideration. However, the availability of euro area infrastructures for OTC derivatives is still limited. A major euro area clearing infrastructure is the German-based Eurex Clearing AG, which serves OTC equity derivatives as well as certain types of repo transaction. For OTC foreign exchange derivatives settlement, CLS is the main infrastructure (with a 53% market share); however, about 35% of OTC foreign exchange transactions are still cleared and settled through correspondent banking arrangements. In addition, Eurex Clearing has recently established a CCP for CDS and another euro area CCP for CDS is currently under development by the French clearing house LCH.Clearnet SA.
© ECB - European Central Bank
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