Bridging the Gap Between the Private and Public Regulation of OTC Derivatives Markets: Analysis of the Performance of the 'Flawed Asset' and Close-out Netting Provisions in the ISDA Master Agreement During the Global Financial Crisis and the Subsequent Regulatory Reforms relating to Central Clearing and Initial and Variation Collateral Margining

Abstract

OTC¹ derivatives markets have experienced phenomenal growth since the early days of the markets' development in the late 1970s and 1980s. By December 2008, the Bank for International Settlements reported that the size of global OTC derivatives markets, as measured by the notional value of all outstanding derivatives contracts, was USD 592 trillion.² This astonishing amount represented several times the entire global money supply.³ The cost of replacing all of these outstanding derivatives contracts with equivalent contracts at market price was USD 25 trillion, reflecting the aggregate credit exposure of all market participants.⁴ As one commentator observed, "over-the-counter (OTC) derivatives have emerged as a global behemoth- the '800 pound gorilla' of modem financial markets".⁵

¹ OTC refers to the term 'over-the-counter'.

² The Bank for International Settlements, BIS Quarterly Review (June 2009). It should be noted that notional value reflects the benchmark against which cash flows are calculated in the context of derivatives transactions and does not reflect the actual value at risk.

³ Above n 2.

⁴ Above n 2.

⁵ Dan Awrey "The Dynamics of OTC Derivatives Regulation: Bridging the Public-Private Divide" (2010) 11(2) E.B.O.R. 155 at 155.