The OTC market is organized by the market maker system. An important difference between OTC market and exchange market is that the brokerage system is not adopted, and investors directly trade with futures derivatives institutions. Therefore, futures derivatives operators are direct participants and market organizers in OTC market. They will create opportunities for derivatives trading and organize market activities.
Another feature of the OTC market is that contracts are bought, sold and exchanged through bargaining. In other words, OTC derivatives are privately negotiated contracts. The target of OTC trading is non-standardized, and sometimes the value of the target is still great. OTC derivatives are tailor-made according to the special requirements of customers, and their personality characteristics are very obvious. However, in order to avoid the risk of over-the-counter trading, futures operating institutions often hedge their risks in on-market trading or exchanges.
The last feature of OTC derivatives market is relatively loose supervision. In the past, the OTC market in the United States was scattered, lacking a unified organization and articles of association, and it was difficult to supervise. At that time, the trading efficiency was not as good as that of derivative contracts traded on exchanges. However, with the rapid development of electronic trading technology, the global OTC derivatives market has exploded. In financial derivatives trading, over-the-counter trading has greatly exceeded the trading volume of exchanges. According to the statistics of the Bank for International Settlements, as of the end of June 2008, the nominal principal of global OTC derivatives contracts (because the value of financial derivatives is based on some basic assets, the nominal principal refers to the value of basic assets or subject matter referred to in financial derivatives contracts) was 683.7 trillion US dollars, and the market value (if financial derivatives are calculated, their market value will be liquidated) reached 20.4 trillion US dollars. The exposure value of credit risk (the loss to traders when financial derivatives default cannot be liquidated, which is about equal to the market value MINUS the offset balance) is 3.9 trillion US dollars. By June 2008, the total nominal principal of on-market futures and options was $82.2 trillion, and over-the-counter futures was $683.4 trillion, totaling $765.9 trillion. OTC transactions accounted for 82.4% of the total financial derivatives transactions from 200 1 to 89.3%.
Development and supervision of OTC market in the United States
The earliest OTC financial derivatives transactions in the United States are stock options and forward transactions on stocks (especially company stocks). Over-the-counter financial derivatives based on interest rate, exchange rate and credit rating have existed widely as early as 19 century. Even OTC structured products, which are generally considered as modern financial innovations, can be traced back to decades before the 1929 financial crisis. Among these various OTC financial derivatives transactions, one transaction only settles the difference between the agreed price and the due market price, but does not actually deliver the underlying assets. At that time, people called this kind of transaction a contract for difference.
The federal supervision of commodity derivatives trading in the United States began with the futures trading act of 192 1, which requires that grain futures must be conducted on exchanges with government permission, and prohibits off-site grain futures and options trading through special taxes. Supervision is mainly aimed at agricultural products trading. With the development of modern financial innovation in 1970s, the object of government supervision gradually expanded to financial derivatives. 1974, on the one hand, the amendment to the American Commodity Exchange Law expanded the scope of "commodities", including not only the agricultural products originally listed, but also "all other commodities or terms" ... and all services and rights that are being or will be traded in future delivery contracts; On the other hand, it announced the establishment of an independent Commodity Futures Trading Commission (CFTC), giving it exclusive supervision over the futures market. Due to the limitation of understanding, and many important OTC financial derivatives transactions did not appear when the Commodity Exchange Law was revised, the Commodity Exchange Law gave CFTC extensive supervision power over the futures market, but failed to make a clear definition of futures.
OTC financial derivatives are private contracts based on financial assets or financial variables. Although they have different forms and purposes, their most basic function is risk management. It is precisely because of this essential attribute of OTC financial derivatives that CFTC believes that OTC and OTC transactions are based on the same function, have the same structure and purpose, and the differences in places cannot change the basic characteristics of products. Therefore, OTC financial derivatives belong to futures and should be regulated by the Commodity Exchange Law. CFTC has the exclusive right to supervise the futures market. "Any activity aimed at transferring price risk should be under the jurisdiction of CFTC".
OTC financial derivatives are private contracts based on interest rates, exchange rates and indexes. The non-standardized characteristics determine that its supervision cannot simply apply the requirements of on-site transactions. The United States tries to regulate the practice of all financial derivatives with the floor rule system, which makes OTC financial derivatives face the influence of legal uncertainty, and many institutions shift the focus of OTC financial derivatives to London and other financial centers. In order to ensure the competitive position of the United States in the global OTC financial derivatives market, CFTC's exercise of supervision power over OTC financial derivatives is not to place it under the constraints of rules, but to ensure that it is not affected by rules, and the supervision power is actually alienated into immunity.
The SEC's supervision of OTC financial derivatives also follows the principle of relaxation and exemption. During the period of 1997, the SEC's new regulations on OTC derivatives dealers not only relaxed the requirements for net capital, but also allowed dealers to use the internal "VAR" model to determine market risk capital, and exempted members of OTC derivatives dealers' self-regulatory organizations and securities investor protection companies. At the same time, it exempts some rules of the Commodity Exchange Law, which is traditionally applicable to brokerage traders, and allows OTC derivatives traders to apply the more flexible rules of the Commodity Exchange Law.
Banks are active promoters and important trading subjects of OTC financial derivatives. Since the 1970s, with the aggravation of interest rate and exchange rate risks and the separation of traditional deposit and loan business from financial liberalization, banks have actively carried out product and business innovation and intervened in OTC financial derivatives trading on a large scale.
Imperfect laws lead to "malicious and ineffective turf wars and costly uncertainties", and excessive speculation caused by lack of supervision has become the fuse and catalyst of the 2008 US financial crisis. In this context, in July of 20 10, the United States passed the Wall Street Transparency and Accountability Act, which specifically targeted at OTC derivatives, classified OTC financial derivatives according to their variety functions and trading functions, and assigned the regulatory authority to different subjects, while emphasizing coordination and cooperation, so as to achieve a unified regulatory goal through mandatory consultation and coordination mechanisms.
It is worth noting that during the financial crisis in 2008, banks participated in a large number of transactions of financial derivatives such as CDS, which brought great risks to the market. The Volcker Rule adopted by the Wall Street Transparency and Accountability Act prohibits federally guaranteed banks from proprietary trading of financial derivatives, limits their OTC financial derivatives business to hedging and market-making activities, and divests the swap business of banks to their independent subsidiaries through the Lincoln Rule. The combination of "Volcker Rule" and "Lincoln Rule" will greatly reduce the participation of banks in OTC financial derivatives trading.