Current Issues Affecting the OTC Derivatives Market and its Importance to London

Lynton Jones of Bourse Consult was contracted by the City of London Corporation to report on “Current issues affecting the OTC derivatives Market and its importance to London”.  The paper was published today and can be downloaded here.

Abstract

The Over the Counter (OTC) Derivatives market is a global market and needs global Central Counter Parties (CCPs). Thus the US and European Commission should not try to create Regional CCPs for Over the Counter (OTC) derivatives, according to a new report from Bourse Consult, published by the City of London Corporation today.

The report examines the scale and scope of the OTC derivatives industry, its role in the financial crisis and its importance to London’s financial centre. London has 43% of the global OTC derivatives market by value, whilst the US has 24%.

The report suggests that Collateralised Debt Obligations (CDOs) on Asset Backed Securities (ABS), sold into highly leveraged Structured Investment Vehicles (SIVs) and held off banks’ balance sheets, were the major “guilty parties” in the financial crisis. The report finds little evidence that Credit Default Swaps (CDS) – which were traded far more widely than CDOs – contributed significantly to the crisis.

The report concludes by making recommendations for future regulation of the OTC derivatives market in the US and European Union.

Download report here.

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