Linking Market Participants in the Trade Lifecycle

History is full of examples of crises triggered by unregulated derivatives trading. During the Dutch Tulip Mania of 1637, a huge bubble took place where derivative futures in tulip bulbs were swapped at exceptionally high prices until a spectacular collapse left many investors in poverty. In 2008, the demise of Lehman Brothers as well as the inability of AIG to meet its obligations to pay investors to whom it had sold credit default swap insurance unleashed a tsunami that shook the foundations of the global financial system and underscored the systemic importance of OTC derivatives. The global financial crisis drew widespread attention to serious inadequacies in the OTC derivatives market and the risks these contracts present to the broader economy.

This paper examines the vital role of derivatives in the capital markets, reviews the regulatory initiatives in global financial capitals that will address weaknesses in the OTC derivatives market by changing how they are traded and cleared, which will drive new connectivity requirements for the market’s key players.

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