The Microstructure of Financial Derivatives Markets: Exchange-Traded versus Over-the-Counter

In this report the author focusses on the microstructure of derivatives markets. While the primary objective is to examine derivatives markets in Canada, the author also discusses certain developments in global derivatives markets that are bound to influence the functioning and development of financial markets in a small, open economy such as Canada's. It is argued that most of the characteristics that have traditionally differentiated the two derivatives market structures, organized exchanges and over-the-counter markets, are no longer clearly defined. Moreover, if centralized multilateral netting schemes are implemented for over-the-counter derivatives trading and if automated trade execution systems become the norm for derivatives exchanges, the differences between these two market structures are likely to become even smaller.