New Research Project on OTC Derivatives Market and Financial Transaction Taxes

The collapse of Lehman Brother’s investment bank in 2008 demonstrated major weaknesses in the structure of the over-the-counter derivatives market and the design of OTC derivatives contracts. The European Union and the United States are adopting legislation that would require standardised OTC derivatives contracts to be traded on exchanges and cleared through clearing houses in order to increase transparency and reduce counter-party credit risks and systemic risk in the derivatives markets. This project will analyse from an empirical and theoretical perspective the relationship between the spreads on OTC credit default swap contracts on the value and yields of the underlying sovereign bonds issued by European union countries and the bonds issued by large EU-based banking institutions. The project aims to provide a more thorough understanding of the impact of the proposed requirements to trade and clear OTC credit derivatives on exchanges and clearing houses. The project will also examine the proposal by the European Commission for a financial transaction tax and assess the legal, economic and regulatory implications of its implementation.