The report* that has just been published by the City of London on over-the-counter (OTC) derivatives makes for alarming reading if, like me, you believe that politicians and regulators should approach the financial crisis as the medical profession would approach a sick patient: by diagnosing the illness and then prescribing treatment.
There are a couple of characteristics of the OTC markets that are important to recognise.
First, they are much bigger than the markets that are conducted on exchanges. The report shows that the market value of OTC derivatives contracts is eight times larger than exchange-listed derivatives, and that turnover in exchange-listed derivatives is in turn 25 times the turnover in traded cash equities, This gives some sense of the relative size and importance of these markets.