Advertisement

OTC Derivatives and the ‘Competitive Payments System’ Debate: The Lessons from History and Implications for a Supervisory Framework

  • George A. Martin
Chapter
Part of the Advances in Computational Economics book series (AICE, volume 9)

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 Market 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.
This is a preview of subscription content, log in to check access.

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

Bibliography

  1. Aglietta, M., (1994): “Les Systemes de Paiements dans l’integration europeene,” Working Paper.Google Scholar
  2. Allen, F., and Gale, D. (1994): Financial Innovation and Risk Sharing, Cambridge: MIT Press.Google Scholar
  3. Angelini, P. and C. Giannini, (1994): “On the Economics of Interbank Payment Systems,” Economic Notes by Monte dei Paschi di Siena, 23, 194–215.Google Scholar
  4. Baer, H.L., V.G. France, and J.T. Moser, (1994): “Opportunity Cost and Prudentiality — An Analysis of Futures Clearinghouse Behavior,” Working Paper.Google Scholar
  5. Bhasin, V. (1995): “On the Credit Risk of OTC Derivative Users,” Working Paper.Google Scholar
  6. BIS (1990): “Report of the Committee on Interbank Netting Schemes of the Central Banks of the Group of Ten Countries,” Basle, Bank for International Settlements.Google Scholar
  7. BIS (1994a): “Macroeconomic and Monetary Policy Issues Raised by the Growth of Derivatives Markets,” Basle: Bank for International Settlements.Google Scholar
  8. BIS (1994b): “Compendium of Annexes to the Report on Macroeconomic and Monetary Policy Issues Raised by the Growth of Derivatives Markets,” Basle: Bank for International Settlements.Google Scholar
  9. BIS (1995): “Cross-Border Securities Settlements,” Basle: Bank for International Settlements.Google Scholar
  10. BIS (1996): “Central Bank Survey of Foreign Exchange and Derivatives Market Activity,” Basle: Bank for International Settlements.Google Scholar
  11. BIS (1996b): “Settlement Risk in Foreign Exchange Transactions,” Basle: Bank for International Settlements.Google Scholar
  12. BIS (1997) “Real-Time Gross Settlement Systems,” Basle: Bank for International Settlements.Google Scholar
  13. Board of Governors of the Federal Reserve System (1994) Symposium Proceedings: International Symposium on banking and Payment Services. Washington, DC: Board of Governors of the Federal Reserve System.Google Scholar
  14. Borio, C.E.V. and P. Van den Bergh, (1993): “The Nature and Management of Payment System Risks: An International Perspective,” Working Paper.Google Scholar
  15. Borio, C.E.V. (1997) “Monetary Policy Operating Procedures in Industrial Countries,” Working Paper.Google Scholar
  16. Brunner, K. and Meltzer, A. (1971): “The Uses of Money: Money in a Theory of an Exchange Economy,” American Economic Review, 67.Google Scholar
  17. Cannon, J.G., (1900): Clearing-Houses: Their History, Methods, and Administration, New York: D. Appleton and Company.Google Scholar
  18. Cesarano, F., (1994): “The New Monetary Economics and Keynes’ Theory of Money,” Journal of Economic Studies, 21, 39–53.Google Scholar
  19. Clower, R.W., ed., (1973): Monetary Theory, Baltimore: Penguin Books.Google Scholar
  20. Commodity Futures Trading Commision (1993): OTC Derivative Markets and their Regulation: Working Papers, Washington, DC: CFTC.Google Scholar
  21. Commodity Futures Trading Commision (1993): OTC Derivative Markets and their Regulation, Washington, DC: CFTC.Google Scholar
  22. Cowen, T. and R. Kroszner, (1994): Explorations in the New Monetary Economics, Cambridge, MA: Blackwell.Google Scholar
  23. Davidson, P. (1978): Money and the Real World, 2nd ed. New York: MacMillan Press.Google Scholar
  24. Dorn, J.A. and A.J. Schwartz, eds., (1987): The Search for Stable Money — Essays on Monetary Reform, Chicago: University of Chicago Press.Google Scholar
  25. Dotsey, M. and P. Ireland, (1995): “Liquidity Effects and Transactions Technologies,” Journal of Money, Credit, and Banking, 27, 1441–1471.Google Scholar
  26. Dowd, K., (1993): Laissez-faire Banking, New York: Routledge.Google Scholar
  27. Downes, P. and R. Vaez-Zadeh, eds., (1991): The Evolving Role of Central Banks, Washington, DC: International Monetary Fund.Google Scholar
  28. Duca, J.V., and W.C. Whitesell, (1995): “Credit Cards and Money Demand: A Crosssectional Study,” Journal of Money, Credit, and Banking, 27, 604–623.Google Scholar
  29. Duffee, G.R., (1994): “Idiosyncratic Variation of Treasury Bill Yields,” Working Paper.Google Scholar
  30. Dymski, G.A., (1992): “A New View’ of the Role of Banking Firms in Keynesian Monetary Theory,” Journal of Post Keynesian Economics, 14, 311–320.Google Scholar
  31. Eatwell, J., M. Milgate, and P. Newman, eds., (1989): The New Palgrave — Money, New York: W. W. Norton.Google Scholar
  32. Edwards, F.R. and F.S. Mishkin, (1995): “The Decline of Traditional Banking: Implications for Financial Stability and Regulatory Policy,” Federal Reserve Bank of New York Economic Policy Review, 1, 27–45.Google Scholar
  33. Eisenbeis, R.A., (1995): “Private Sector Solutions to Payments System Fragility,” Journal of Financial Services Research, 9, 327–349.Google Scholar
  34. Fanno, M., (1995): The Money Market, New York: St. Martin’s Press.Google Scholar
  35. Feldstein, M., ed., (1991): The Risk of Economic Crisis, Chicago: University of Chicago Press.Google Scholar
  36. Feldstein, M. and J.H. Stock, (1993): “The Use of Monetary Aggregate to Target Nominal GDP,” Working Paper.Google Scholar
  37. Feldstein, M. and J.H. Stock, (1994): “Measuring Money Growth When Financial Markets are Changing,” Working Paper.Google Scholar
  38. Friedman, M. and J. Schwartz, (1963): A Monetary History of the United States 1867–1960, Princeton: Princeton University Press.Google Scholar
  39. Froot, K.A., D.S. Scharfstein, and J.C. Stein, (1992): “Risk Management: Coordinating Corporate Investment and Financing Policies,” Working Paper.Google Scholar
  40. Furfine, C. and J. Stehm, (1996): “Analyzing Alternative Daylight Credit Policies in Real-Time Gross Settlement Systems,” Working Paper. Google Scholar
  41. Giannini, C., (1994): “Confidence Costs and the Institutional Genesis of Central Banks,” Working Paper. Google Scholar
  42. Gilbert, R.A., ed. (1995): “Antitrust Issues and Payment Systems Networks,” Federal Reserve Bank of St. Louis Review, 77. Google Scholar
  43. Glasner, D., (1989): Free Banking and Monetary Reform, Cambridge: Cambridge University Press.Google Scholar
  44. Goodfriend, M. (1991) “Money, Credit, banking and Payments System Policy,” Federal Reserve Bank of Richmond Economic Review, pp. 7–23.Google Scholar
  45. Goodhart, C.A.E., (1969): The New York Money Market and the Finance of Trade, 1900–1913, Cambridge, MA: Harvard University Press.Google Scholar
  46. Goodhart, C.A.E., (1988): The Evolution of Central Banks, Cambridge, MA: MIT Press.Google Scholar
  47. Goodhart, C.A.E., (1991): Money, Information, and Uncertainty, Cambridge, MA: MIT Press.Google Scholar
  48. Goodhart, C., T. Ito, and R. Payne, (1995): “One Day in June, 1993: A Study of the Working of Reuters 2000–2 Electronic Foreign Exchange Trading System,” Working Paper, Parts I and II.Google Scholar
  49. Gorton, G., (1985): “Clearinghouses and the Origin of Central Banking in the United States,” Journal of Economic History, 45, 277–283.Google Scholar
  50. Gorton, G., (1996): “Reputation Formation in Early Bank Note Markets,” Journal of Political Economy, 104, 346–397.Google Scholar
  51. Gorton, G. and Mullineaux, (1987): “The Joint Production of Confidence: Endogenous Regulation and Nineteenth Century Commercial-Bank Clearinghouses,” Journal of Money, Credit, and Banking, 19, 457–468.Google Scholar
  52. Gorton, G. and Rosen, R. (1995): “Banks and Derivatives,” Working paper, Wharton Financial Institutions Center.Google Scholar
  53. Grant, J., (1992): Money of the Mind: Borrowing and Lending in America from the Civil War to Michael Milken, New York: Farrar Straus Giroux.Google Scholar
  54. Grinblatt, M., (1994): “An Analytic Solution for Interest Rate Swap Spreads,” Working Paper.Google Scholar
  55. Hamouda, O.F. and J.N. Smithin, eds., (1988): Keynes and Public Policy After Fifty Years — Volume II: Theories and Method, New York: New York University Press.Google Scholar
  56. Harris, L. (1981) Monetary Theory, New York: McGraw-Hill Book Company.Google Scholar
  57. Harvey, C.R. and R.D. Huang, (1994): “The Impact of the Federal Reserve Bank’s Open Market Operations,” Working Paper.Google Scholar
  58. Hayek, F. (1978) The Denationalization of Money, Hobart Paper.Google Scholar
  59. Heise, A. (1992): “Commercial Banks in Macroeconomic Theory,” Journal of Post Keynesian Economics, 14, 285–296.Google Scholar
  60. Hendricks, D. (1994): “Netting Agreements and the Credit Exposures of OTC Derivatives Portfolios,” Federal Reserve Bank of New York Quarterly Review, 19, 7–18.Google Scholar
  61. Hicks, J., (1967): Critical Essays in Monetary Theory, Oxford: Clarendon Press.Google Scholar
  62. Hoover, K.D., (1988): The New Classical Macroeconomics — A Sceptical Inquiry, Oxford: Basil Blackwell.Google Scholar
  63. Hoover, K. D. (1988b): “Money, Prices and Income in the New Monetary Economics,” Oxford Economic Papers, 40, 150–167.Google Scholar
  64. Howells, P. and I. Biefang-Frisancho Mariscal, (1992): “An Explanation for the Recent Behavior of Income and Transaction Velocities in the United Kingdom,” Journal of Post Keynesian Economics, 14, 367–388.Google Scholar
  65. Humphrey, D.B., (1984): The U.S. Payments System: Costs, Pricing, Competition and Risk, New York: NYU.Google Scholar
  66. Kambhu, J., F. Keane, and C. Benadon, (1996): “Over-the-Counter Derivatives Markets: Interpretation of a Global Survey,” Federal Reserve Bank of New York Economic Policy Review, April, 1–15.Google Scholar
  67. Kashyap, A.N. and J.C. Stein, (1993): “Monetary Policy and Bank Lending,” Working Paper.Google Scholar
  68. Kasman, B., (1992): “A Comparison of Monetary Policy Operating Procedures in Six Industrial Countries,” Federal Reserve Bank of New York Quarterly Review, 17, 5–24.Google Scholar
  69. Keynes, J.M., (1950): A Treatise on Money, London: MacMillan and Co., Limited, vols. I and II.Google Scholar
  70. King, R.G., (1983): “On the Economics of Private Money,” Journal of Monetary Economics, 12, 127–162.Google Scholar
  71. Klein, B. (1974): “The Competitive Supply of Money,” Journal of Money, Credit and Banking, 6.Google Scholar
  72. Klein, R.A. and J. Lederman, eds., (1996): Derivatives Risk and Responsibility, Chicago: Irwin.Google Scholar
  73. Laidler, D.E.W., (1969): The Demand for Money: Theories and Evidence, Scranton, Pennsylvania: International Textbook Company.Google Scholar
  74. Lavoie, M., (1992): Foundations of Post-Keynesian Economic Analysis, Brookfield, Vermont: Edward Elgar Publishing Company.Google Scholar
  75. Li, H.(1996), “Pricing of Swaps with Default Risk,” Working Paper.Google Scholar
  76. Lloyd, C. (1986) Explanation in Social History, New York: Blackwell.Google Scholar
  77. Lyons, R.K., (1993): “Tests of Microstructural Hypotheses in the Foreign Exchange Market,” Working Paper.Google Scholar
  78. Marquardt, J. (1987): “Financial Market Supervision: Some Conceptual Issues,” Working Paper.Google Scholar
  79. Mayer, M., (1995): “Seeking a Grip on the Payments System,” Working Paper.Google Scholar
  80. Mengle, D.L., (1995): “Regulatory Solutions to Payment System Risks: Lessons from Privately Negotiated Derivatives,” Journal of Financial Services Research, 9, 381–391.Google Scholar
  81. Merton, R.C. and Z. Bodie, (1995): “Financial Infrastructure and Public Policy: A Functional Perspective,” Working Paper.Google Scholar
  82. Merton, R.C. and Z. Bodie, (1995): “A Conceptual Framework for Analyzing the Financial Environment,” Working Paper.Google Scholar
  83. Moore, B.J., (1988): Horizontalists and Verticalists — The Macroeconomics of Credit Money, Cambridge: Cambridge University Press.Google Scholar
  84. Moser, J.T., (1994): “Origins of the Modern Exchange Clearinghouse: A History of Early Clearing and Settlement Methods at Futures Exchanges,” Working Paper.Google Scholar
  85. Mott, T., (1989): A Post Keynesian Perspective on a ‘Cashless Competitive Payments System, ’ Journal of Post Keynesian Economics, XI, 360–384.Google Scholar
  86. Myers, M.G., (1931): The New York Money Market- Volume I: Origins and Development, New York: Columbia University Press.Google Scholar
  87. Niehans, J. (1978): The Theory of Money, Baltimore: Johns Hopkins University Press.Google Scholar
  88. O’Brien, R., ed., (1994): Finance and the International Economy, New York: Oxford University Press.Google Scholar
  89. Pan, Y., (1995): “Two Essays on Design and Valuation of Corparate Securities a nd One Essay on International Swaps,” Ph.D. Dissertation, Columbia University.Google Scholar
  90. Paolo, A., (1994): “Studies on Central Bank Operations and Payment Mechanisms,” Ph.D. Dissertation, Brown University.Google Scholar
  91. Parkinson, P., A. Gilbert, E. Gollob, L. Hargraves, R. Mead, J. Stehm, and M.A. Taylor, (1992): “Clearance and Settlement in U.S. Securities Markets,” Washington, DC: Board of Governors of the Federal Reserve System.Google Scholar
  92. Perold, A., (1995): “The Payment System and Derivative Instruments,” Harvard Business School Working Paper. Google Scholar
  93. Pesek, B.P., (1988): Microeconomics of Money and Banking and Other Essays, New York: New York University Press.Google Scholar
  94. Petersen, D.J., (1995): “Monetary Aggregates, Payments Technology, and Institutional Factors,” Federal Reserve Bank of Atlanta Economic Review, Nov/ Dec, 30–37.Google Scholar
  95. Portes, R. and A.K. Swoboda, eds., (1987): Threats to International Financial Stability, Cambridge: Cambridge University Press.Google Scholar
  96. Roberds, W. (1993): “The Rise of Electronic Payments Networks and the Future Role of the Fed with Regard to Payment Finality,” Economic Review, 78, 1–22.Google Scholar
  97. Roberds, W. (1995): “Financial Crises and The Payments System: Lessons from the National Banking Era,” Economic Review, 80, 15–31.Google Scholar
  98. Rogers, C., (1989): Money, Interest, and Capital — A Study in the Foundations of Monetary Theory, Cambridge: Cambridge University Press.Google Scholar
  99. Rosenberg, A. (1985) The Structure of Biological Science, New York: Cambridge University Press.Google Scholar
  100. Rosenberg, A. (1992) Economics — Mathematical Politics of Science of Diminshing Returns, Chicago: University of Chicago Press.Google Scholar
  101. Rousseas, S., (1992): Post Keynesian Monetary Economics, 2nd ed., Armonk, New York: M.E. Sharpe.Google Scholar
  102. Saunders, A. and L.J. White, eds., (1986): Technology and the Regulation of Financial Markets — Securities, Futures, and Banking, Lexington, Massachusetts: Lexington Books.Google Scholar
  103. Sechrest, L.J., (1993): Free Banking — Theory, History, and a Laissez-Faire Model, Westport, Connecticut: Quorum Books.Google Scholar
  104. Sober, E. (1988) Reconstructing the Past: Parsimony, Evolution and Inference, Cambridge: MIT Press.Google Scholar
  105. Solomon, E.H., ed., (1987): Electronic Funds Transfers and Payments: The Public Policy Issues, Boston: Kluwer-Nijhoff Publishing.Google Scholar
  106. Sprague, O. (1910): History of of Crises Under the National Banking System, Washington, DC: GPO.Google Scholar
  107. Stehm, J. (1992): “Clearance and Settlement of Mortgage-Backed Securities Through the Participants Trust Company,” Working Paper.Google Scholar
  108. Stigum, M., (1989): The Repo and Reverse Markets, Homewood, Illinois: Dow Jones-Irwin.Google Scholar
  109. Subrahmanyam, G., (1993): Empirical Definition of Money, New York: Garland Publishing, Inc.Google Scholar
  110. Sultan, J. (1995): “Volatility Spillover from Interest Rate Swaps,” Working Paper.Google Scholar
  111. Teggart, F. (1977) Theory and Processes of History, Berkeley: University of California Press.Google Scholar
  112. Thompson, N., (1993): Portfolio Theory and the Demand for Money, New York: St. Martin’s Press.Google Scholar
  113. Timberlake, R.H., (1984): “The Central Banking Role of Clearinghouse Associations,” Journal of Money, Credit, and Banking, 16, 1–15.Google Scholar
  114. Tobin, J., (1980): Asset Accumulation and Economic Activity — Reflections on Contemporary Macroeconomic Theory, Chicago: University of Chicago Press.Google Scholar
  115. Ungar, E., (1996): Swap Literacy — A Comprehensible Guide, Princeton: Bloomberg Press.Google Scholar
  116. Wenninger, J. and D. Laster, (1995): “The Electronic Purse,” Federal Reserve Bank of New York Current Issues in Economics and Finance, 1, 1–5.Google Scholar
  117. White, E. N., (1983): The Regulation and Reform of the American Banking System, Princeton: Princeton University Press.Google Scholar
  118. White, L.H., (1984): “Competitive Payments Systems and the Unit of Account,” American Economic Review, 74, 699–712.Google Scholar
  119. White, L. (1984b): Free Banking in Britain: Thoery, Experieince, Debate, 1800–1845, Cambridge: Cambridge University Press.Google Scholar
  120. White, L.H., (1989): Competition and Currency — Essays on Free Banking and Money, New York: New York University Press.Google Scholar
  121. Wilcox, J. and Hancokc, D. (1996) “Intraday management of Bank Reserves: The Effects of Caps and Fees,” Journal of Money, Credit and Banking, 28, pp 870–908.Google Scholar
  122. Wray, L.R., (1992): “Commercial Banks, the Central Bank, and Endogenous Money,” Journal of Post Keynesian Economics, 14, 297–310.Google Scholar

Copyright information

© Springer Science+Business Media New York 1999

Authors and Affiliations

  • George A. Martin
    • 1
  1. 1.Department of EconomicsUniversity of MassachusettsUSA

Personalised recommendations

Cite chapter

Buy options