The Changing Role of OTC Derivatives: Hedging, Speculation and Risk Transfer

Over the counter derivatives remain central to how firms, banks and governments manage financial risk, yet the post crisis reform programme has altered the character of that risk rather than removed it. Drawing on statistics from the Bank for International Settlements (BIS), progress reporting from the Financial Stability Board (FSB) and recent South African regulatory publications, this article examines hedging, speculation and risk transfer in turn and asks where risk now sits. Bilateral counterparty credit risk has been reduced through netting, margining and central clearing. In its place, the system carries greater liquidity demands, a heavier dependence on a small number of clearing and dealing institutions, and operational and data risks that are harder to measure. South Africa illustrates the transition. Rand interest rate products are still cleared bilaterally because no domestic central counterparty exists for them, while regulators have proposed mandatory clearing and stronger capital standards for nonbank providers. The article closes with the implications for risk practitioners.