FMP 5. Exchanges and OTC Markets

Learning Objectives

1) Describe how exchanges can be used to alleviate counterparty risk.

2) Explain the developments in clearing that reduce risk.

3) Describe netting and describe a netting process.

4) Describe the implementation of a margining process; explain the determinants of and calculate initial and variation margin requirements.

5) Describe the process of buying stock on margin without using CCP and calculate margin requirements.

6) Compare exchange-traded and OTC markets and describe their uses.

7) Identify risks associated with OTC markets and explain how these risks can be mitigated.

8) Describe the role of collateralization in the OTC market and compare it to the margining system.

9) Explain the use of special purpose vehicles (SPVs) in the OTC derivatives market.