1.4 Regulation of Derivative Markets

OTC derivative markets operate with less regulation and oversight than do exchange-traded derivative markets.

However, since the 2007 financial crisis, OTC derivative activity has come to the attention of lawmakers. The planned regulations may require OTC transactions to be traded through a clearing agency and reported to regulators.

The new regulations began to blur the distinction between OTC and exchange-listed markets. In both the United States (the Wall Street Reform and Consumer Protection Act of 2010, commonly known as the Dodd–Frank Act) and Europe (the Regulation of the European Parliament and of the Council on OTC Derivatives, Central Counterparties, and Trade Repositories), regulations are changing the characteristics of OTC markets.

The degree of OTC regulation, although increasing in recent years, is still lighter than that of exchange-listed market regulation. Many transactions in OTC markets will retain a degree of privacy with lower transparency, and most importantly, the OTC markets will remain considerably more flexible than the exchange-listed markets.

Exchange markets are said to have transparency, which means that full information on all transactions is disclosed to exchanges and regulatory bodies. All transactions are centrally reported within the exchanges and their clearinghouses, and specific laws require that these markets be overseen by national regulators. Standardization of contract terms of derivatives facilitates the creation of a clearing and settlement operation.