Over-the-counter derivatives: market failure and remedies.

In the aftermath of the most recent financial crisis, scientists have searched for new market institutions that can reduce the likelihood and severity of future crises. Over-the-counter (OTC) derivatives are considered as one of the important sources of risk to the financial system. OTC derivatives are a type of financial instruments traded directly between the parties instead of on an exchange. The first part of the PhD project will develop a conceptual framework for derivatives and for OTC trading. Furthermore, it will identify the specific difficulties and risks involved with OTC trading of derivatives. In the second part, the project will analyze the current legal reforms for the OTC derivatives market proposed in the EU. It will investigate whether the recent reform proposals are effective and efficient. Further, it will identify the other possible reform alternatives. One of the main proposed remedies is to adopt a central clearing system for OTC derivatives. In case of central clearing, a central party clears, i.e. executes the transaction and bares the risk that one of the parties cannot execute the transaction. The PhD project will give an overall picture of central clearing and will identify the weaknesses of the system. The PhD project will end with a proposal for legislation for central clearing. The final output of the project will be a structured overview of the market failure of OTC derivatives and the regulatory methods to remedy these imperfections.