November 27th, 2014
from the Chicago Fed
Derivatives have long been important tools for managing risk. In particular, as Culp (2004) explains, "derivatives can be used as a means of engaging in risk transfer, or the shifting of risk to another firm from the firm whose business creates a natural exposure to that risk" (p. xiv). In this article, we discuss some recent developments relating to the regulation of derivatives markets, specifically the Group of Twenty (G-20) mandates, and examine the infrastructure that supports derivatives markets (including both the trade execution and posttrade clearing and settlement processes).
Then we identify some of the policy issues raised by the G-20 market structure mandates. To provide a foundation for that discussion, first we explain some key concepts and terms.