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Submission of this paper to the Faculty predates date of submission to the Digital Commons. This document was received by the Digital Commons on August 29, 2007 and posted on September 7, 2007. Original document was submitted as an honors thesis requirement.

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Article

Abstract

Beginning in the 1980's over-the-counter (OTC) derivatives began trading in large amounts. Their trading volume grew rapidly, to a total notional value of $88.2tn by the end of 1999; their gross market value was about $2.8tn.[ John O. Matthews and Cathy A. Rusinko, "The Regulation in the US OTC derivatives market: Towards a more collaborative framework," Derivatives Use, Trading & Regulation 7.4 (2002):337] However, since large amounts of money are at stake in the OTC derivatives market, gaps in the regulatory framework and standards have the potential to cause large financial loses, which have that ability to undermine confidence in the financial system. As a result, there has been an ongoing debate in the United States about the proper role for regulation in the market for derivatives. In order to properly asses a regulatory approach, legislators and market participants must have thorough knowledge in derivatives and understand the market effectively. The derivatives market is vast with different derivative instruments that are traded on exchanges and over OTC markets. The large amounts of derivatives trading, and their potential threat to the stability of the global financial system, needs to be monitored by an effective regulatory framework that promotes growth and innovation and prevents risks and market failures. The successful role of the private sector in creating standardization and stability within the OTC derivatives market suggests that this type of framework could be successful in monitoring the market.

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