Derivative transactions, bilateral (over-the-counter derivative transactions)

A preferred form of derivatives in certain market segments has been contracts between two partners. As a result, the overall market turnover of derivatives is not very transparent for third parties and, above all, for the supervisory authorities. It is therefore uncertain what effects the use of derivatives would have in the event of a crisis. – This risk is exacerbated by the fact that only a few “big players” trade in the individual market segments for derivatives worldwide. Because of the low transparency of the market, most losses also remain undetected. For this reason, there are repeated calls for a ban on two-sided and non-market transactions. – In the summer of 2006, it became known that the hedge fund Amaranth Advisors LLC lost more than half of its nearly 10 billion euro assets within a few days due to mistaken speculation in natural gas futures. Because most of the contracts were bilateral, the risky trades remained completely hidden from the market and regulators. – In the fall of 2009, the G20 agreed on a series of measures to monitor the OTC derivatives market, most notably the establishment of central counterparties, a ban on trading outside organized markets, and mandatory reporting to a central transaction registry. A significant risk reduction is seen in the obligation to settle all transactions via central counterparties (clearing houses, in short: clearers). These clearing houses bundle the orders, increase transparency and reduce transaction costs. Above all, they assume the risk if one of the parties involved in trading fails. For its part, the clearer requires collateral from market participants, for example in the form of low-risk securities such as bonds from first-class issuers. – See clearing department, derivatives, derivatives transactions clearing obligation, derivatives information obligation, derivatives transactions reporting obligation, future, herding behavior, node, credit risk, credit derivative, option, run, rush to exit. – See BaFin Annual Report 2009, p. 17, p. 42 (supervisory gaps to be closed); BaFin Annual Report 2011, p. 43 et seq. (OTC derivatives market now regulated; details), BaFin Annual Report 2012, p. 62 (over-the-counter derivatives transactions via central counterparties to be included in regulation) and the respective BaFin Annual Report, chapter “International,” Financial Stability Report 2012, p. 92 et seq. (over-the-counter derivatives market since 2003; regulatory issues), BaFin Annual Report 2013, p. 163 (new requirements for OTC derivatives transactions due to amended DerivateV).

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University Professor Dr. Gerhard Merk, Dipl.rer.pol., Dipl.rer.oec.
Professor Dr. Eckehard Krah, Dipl.rer.pol.
E-mail address: info@ekrah.com
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