The Extent of Mitigation of Risks through Regulation of Over-the-Counter (OTC) Derivative Markets in Different Jurisdictions

Abstract

Over the last decade dealing with derivative financial instruments (basically forwards, futures, options and combinations of these), particularly in the Over-The- Counter derivatives market has become a central activity for major wholesale banks and financial institutions. Major new regulatory initiatives are under consideration in various jurisdictions and also adopted in some, as a means for increasing transparency and reducing the various types of risks involved in OTC derivative trading. This paper tries to understand the concept of derivatives as a whole. The main aim of the paper will be to analyze the different types of risks that are involved in OTC derivative trading. It will put forward these risks in a manner so as to enable the reader to get an in depth study of the risks in OTC derivative market through qualitative and quantitative research. As mentioned above, this paper will then focus on the regulatory regimes of three major jurisdictions i.e. India, United States and Europe and will conclude that these regulations are sufficiently able to mitigate these risks in their respective jurisdictions. Lastly, certain measures are recommended for different jurisdictions so as to further increase the ambit of sufficiency in mitigating the risks involved.