Modern Banking and OTC Derivatives Markets: The Transformation of Global Finance and its Implications for Systemic Risk

Abstract

This Occasional Paper describes and analyzes key elements of modern banking and the global OTC derivatives markets that are relevant to a consideration of systemic financial risk in the international financial system.While acknowledging and taking as given the considerable benefits that derivatives have conveyed to global finance and international financial markets, the paper identifies and examines sources of risk to market stability, and imperfections in the underlying institutional and market infrastructures.Because relatively limited progress has been made in addressing some of the problems that surfaced during the near-collapse of the hedge fund Long-Term Capital Management (in the autumn of 1998) and the market turbulence that followed, several areas are identified where further efforts are necessary if the risks of financial instability are to be reduced and avoided, and if the efficiency gains of modern finance are to be preserved.This paper is the product of a team effort led by Garry J.

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