There has been a lot of talk in the press and the offices of global regulators about OTC contracts in the last few days - much of which is absolute twaddle, some of which makes some kind of sense...

This all seems to have been based upon the demise of Bear Stearns, claiming that the US Fed had to step in because of their huge risk exposure in the OTC market and the chaos that would have ensued should such an important counterparty unwind. This is only partially true as Bear's exposures were not just to the OTC market, and their fall would have caused ripples in many more markets than OTC derivatives.

However, they were exposed to huge OTC risks, and this has raised the question of central counterparties. The exchanges have therefore leaped in and claimed that all would be safer should all OTC contracts be on-exchange. Now ...   more »