Global_derivatives_m - The Global Derivatives Market An Introduction White Paper T he Global Derivatives Market An Introduction Table of Contents

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The Global Derivatives Market An Introduction White Paper
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The Global Derivatives Market – An Introduction 3 Table of Contents Executive Summary 4 1 Introduction 5 2 Fundamentals and Market Characteristics 6 2.1 Basics of derivatives 6 2.2 Development of the market and Europe’s role 10 2.3 The derivatives trading value chain 14 2.4 Competition in the global derivatives market 19 3 Imperatives for a Well-Functioning Derivatives Market 23 3.1 Safety and effective risk mitigation 23 3.2 Innovation 27 3.3 Ef± ciency 30 4 Conclusion 32 List of Exhibits 34 Glossary 35 References 40 List of Abbreviations 42
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The Global Derivatives Market – An Introduction 4 Derivatives are an important class of F nancial instru- ments that are central to today’s F nancial and trade markets. They offer various types of risk protection and allow innovative investment strategies. Around 25 years ago, the derivatives market was small and domestic. Since then it has grown im- pressively – around 24 percent per year in the last decade – into a sizeable and truly global market with about €457 trillion of notional amount outstanding. No other class of F nancial instruments has experi- enced as much innovation. Product and technology innovation together with competition have fuelled the impressive growth that has created many new jobs both at exchanges and intermediaries as well as at related service providers. As global leaders driving the market’s development, European derivatives players today account for more than 20 percent of the Euro- pean wholesale F nancial services sector’s revenues and contribute 0.4 percent to total European GDP. Given the derivatives market’s global nature, users can trade around the clock and make use of deriva- tives that offer exposure to almost any “underlying” across all markets and asset classes. The derivatives market is predominantly a professional wholesale market with banks, investment firms, insurance companies and corporates as its main participants. There are two competing segments in the derivatives market: the off-exchange or over-the-counter (OTC) segment and the on-exchange segment. Only around 16 percent of the notional amount outstanding is traded on exchanges. ±rom a customer perspective, on-exchange trading is approximately eight times less expensive than OTC trading. By and large, the derivatives market is safe and efF cient. Risks are particularly well controlled in the exchange segment, where central counterparties (CCPs) operate very efF ciently and mitigate the risks for all market participants. In this respect, derivatives have to be distinguished from e.g. structured credit- linked security such as collateralized debt obligations that triggered the F nancial crisis in 2007. The derivatives market has successfully developed under an effective regulatory regime. All three prerequisites for a well-functioning market – safety, efF ciency and innovation – are fulF lled. While there is no need for structural changes in the framework
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This note was uploaded on 02/09/2012 for the course COMPUTER S a303 taught by Professor None during the Spring '11 term at BEM Bordeaux Management School.

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Global_derivatives_m - The Global Derivatives Market An Introduction White Paper T he Global Derivatives Market An Introduction Table of Contents

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