This market has played an important and successful role in the management of risk at financial institutions, a major element of their corporate governance. I do not say that the success of the OTC derivatives market in creating greater financial flexibility is due solely to the prevalence of private reputation rather than public regulation.
Still, the success to date clearly could not have been achieved were it not for counterparties’ substantial freedom from regulatory constraints on the terms of OTC contracts. This freedom allows derivatives counterparties to craft contracts that transfer risks in the most effective way to those most willing and financially capable of absorbing them.