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Over the Counter Derivatives Finally Market Traded

Sep 08 2009

Over the Counter Derivatives Finally Market Traded

For over a year commentators and bloggers have been writing that Over the Counter (OTC) Derivatives need to be traded in an open market to avoid situations that occurred during the credit crisis which brought major financial institutions to the brink of bankruptcy. Now 15 major banks including JP Morgan Chase, Bank of America, Citigroup and Goldman Sachs have agreed to begin moving the credit default swaps and interest rate swaps through open markets. This comes no the heels of regulators looking to restrict both kinds of swaps if kept private.

The credit default swap (CDS) market is believed to be $25 trillion in value and was blamed for the demise of AIG, the insurance giant saved by the federal government. 80% of all CDS transactions will go through an open market beginning in October. With 70% of interest rate swaps going through an open market beginning in December. The only current provider of such open markets is The Intercontinental Exchange (ICE). The NYSE Euro next (NYX), another open market operator, has been vocal about the banks reluctance to make all OTC transactions public.

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