Futures-friendly derivatives: a fix for the over-the-counter derivatives mess Online publication date: Tue, 17-May-2016
by James Kurt Dew
International Journal of Financial Innovation in Banking (IJFIB), Vol. 1, No. 1/2, 2016
Abstract: This note presents an easily implemented, inexpensive, private sector innovation, a futures-friendly derivative (FFD) intended to compete with the unnecessarily credit-risky, dealer-traded, over-the-counter (OTC) derivatives and their clumsy, expensive, government-mandated clearing counterparties (OTC CCPs.) The FFD may be traded and cleared as though it is a futures contract. Perhaps, if successful, it will ultimately end OTC CCPs' 'systemically important' classification, reducing our more than $1 trillion estimate of the government's implicit credit exposure created by OTC CCPs. Section 1 describes the proposed instruments and their purpose and Section 2 explains the source of the OTC derivative markets' inefficiency. Section 3 shows how OTC derivatives create unnecessary risk and destroy value in bankruptcy - changing the nature of the systemic risk they create but not the amount. Section 4 describes the new instruments. Section 5 concludes the note.
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