OTC Derivatives and the ‘Competitive Payments System’ Debate: The Lessons from History and Implications for a Supervisory Framework
Abstract
The numbers are staggering. According to the Bank for International Settlements (1996), the notional value of global transactions involving derivative contracts are immense: total turnover in 1995 for exchange-traded instruments amounted to 327.6 trillion US dollars, with a year-end amount outstanding of 9.2 trillion dollars; for overthe-counter (OTC) derivatives, the total notional value outstanding at the end of March, 1995 is estimated to have been 40.6 trillion dollars, with figures on turnover unknown.1 With numbers so huge, one is driven to ask: what do these numbers mean? While much of the discussion of derivatives has sought to deflate the significance of these notional quantities—often for virtuous reasons—we are convinced that they do have both economic, monetary, and policy significance. This conviction arises in part from a general predisposition to take seriously the terms in which market participants frame decisions, but also from theoretical reflection on the economic nature of these contracts. It is this latter reflection which is ultimately the subject of this paper, and which guides us through the thickets, plains and grassy knolls of monetary theory.
Keywords
Mutual Fund Credit Risk Federal Reserve Payment System Derivative MarketPreview
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