- Burkhard Drees, Garry Schinasi, Charles Kramer, and R. Craig
- Published Date:
- January 2001
© 2000 International Monetary Fund
Production: IMF Graphics Section
Figures: Choon Lee
Typesetting: Alicia Etchebarne-Bourdin
Library of Congress Cataloging-in-Publication Data
Schinasi Garry J.
Modern banking and OTC derivatives markets: the transformation of global finance and its implications for systemic risk/Garry J. Schinasi…[et al.].
p. cm. —(Occasional paper/International Monetary Fund; 203)
Includes bibliographical references.
1. Derivative securities. 2. Over-the-counter markets. 3. International finance. 4. Risk. I. Title. II. Occasional paper (International Monetary Fund); no. 203.
HG6024.A3 S355 2000
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The following symbols have been used throughout this paper:
… to indicate that data are not available:
— to indicate that the figure is zero or less than half the final digit shown, or that the item does not exist;
– between years or months (e.g., 1998–99 or January—June) to indicate the years or months covered, including the beginning and ending years or months;
/ between years (e.g., 1998/99) to indicate a crop or fiscal (financial) year.
“Billion” means a thousand million.
Minor discrepancies between constituent figures and totals are due to rounding.
The term “country,” as used in this paper, does not in all cases refer to a territorial entity that is a state as understood by international law and practice; the term also covers some territorial entities that are not states, but for which statistical data are maintained and provided internationally on a separate and independent basis.
This Occasional Paper describes and analyzes key elements of modern banking and the global OTC derivatives markets that are relevant to a consideration of systemic financial risk in the international financial system. While acknowledging and taking as given the considerable benefits that derivatives have conveyed to global finance and international financial markets, the paper identifies and examines sources of risk to market stability, and imperfections in the underlying institutional and market infrastructures. Because relatively limited progress has been made in addressing some of the problems that surfaced during the near-collapse of the hedge fund Long-Term Capital Management (in the autumn of 1998) and the market turbulence that followed, several areas are identified where further efforts are necessary if the risks of financial instability are to be reduced and avoided, and if the efficiency gains of modern finance are to be preserved.
This paper is the product of a team effort led by Garry J. Schinasi, Chief of the Capital Markets and Financial Studies Division in the IMF’s Research Department. The team of authors, which also included R. Sean Craig, Burkhard Drees, and Charles Kramer, benefited from a series of discussions with officials and market participants in Frankfurt, London, New York, Paris, and Tokyo during 1999 and 2000. The authors are grateful for comments by Michael Mussa (Economic Counsellor and Director of Research), R. Todd Smith, and other colleagues in the IMF. Subramanian Sriram and Oksana Khadarina provided research assistance, Caroline Bagworth and Adriana Vohden prepared the manuscript, and Jeremy Clift of the External Relations Department coordinated its publication. The paper draws on material published in previous issues of the IMF’s annual International Capital Markets report, and some of the project’s findings are published as Chapter IV of International Capital Markets: Developments, Prospects, and Key Policy Issues (September 2000). The views expressed in this Occasional Paper are those of the participating IMF staff and do not necessarily reflect the views of market participants, national authorities, or the IMF.