Int. J. of Financial Innovation in Banking   »   2016 Vol.1, No.1/2



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Title: Futures-friendly derivatives: a fix for the over-the-counter derivatives mess


Author: James Kurt Dew


Address: Tecnológico de Monterrey, Querétaro, Epigmenio Gonzales 500 Fracc., San Pablo 76310, Querétaro, Qro., Mexico


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.


Keywords: over-the-counter; OTC derivatives; clearing counterparties; futures; swaps; Lehman Brothers bankruptcy; exchange; dark pool; private sector innovation; futures-friendly derivatives; FFD; credit exposure; systemic risk.


DOI: 10.1504/IJFIB.2016.076627


Int. J. of Financial Innovation in Banking, 2016 Vol.1, No.1/2, pp.99 - 108


Submission date: 21 Sep 2015
Date of acceptance: 25 Jan 2016
Available online: 16 May 2016



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