Over-the-counter (OTC) derivatives played an important role in the buildup of systemic risk in financial markets before 2007 and in spreading volatility throughout global financial markets during the crisis. In recognition of the financial and economic benefits of derivatives products, the Group of Twenty (G20) moved to regulate the use of OTC derivatives. Attention has been drawn to the detrimental effects of the United States and the European Union to coordinate OTC reform, but this overlooks an important aspect of the post-crisis process: the exemption of non-financial operators from OTC derivative regulatory requirements. Critically, they remain exempt under existing legislation regardless of the risks they continue to pose through unreported trades and counterparty risks to financial firms. There is still uncertainty around the pricing of derivatives for non-financial operators that could pose a risk to the financial system. This paper concludes that the G20 should seek to promote transparency in the trading of OTC derivatives of sovereigns, local governments and other non-financial operators by adopting accounting criteria able to provide information on off-balance sheet assets and liabilities, and eventually adhering to the centralized counterparty system and the collateralized system of trading.

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CIGI Papers present in-depth analysis and discussion on governance-related subjects. They include policy papers that present CIGI experts' positions or contributions to policy debates, and background papers that contain research findings, insights and data that contribute to the development of policy positions.