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

Authors: James Kurt Dew

Addresses: 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

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

Received: 24 Sep 2015
Accepted: 25 Jan 2016

Published online: 16 May 2016 *

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