Protecting the Investor in Over-the-counter Derivatives

Derivatives are one of the ways that the firm may enter into specialized financial contracts that fix theirs costs or prices. Many different types of futures, options, swaps and other derivatives are traded by firms, banks, professional investors and individuals. Derivatives are divided into ���exchange-traded derivatives���and ���over-the-counter derivatives���. The ���over-the-counter derivatives (OTC derivatives)���means the derivatives that are traded directly between counterparties without the infrastructure of an exchange. The size of the OTC derivatives markets is many times larger than the exchange-traded derivatives markets. The OTC derivatives offer many benefits to our economy, they also hold the potential for being misused. OTC derivatives are individually and privately negotiated by the contractual counterparties. So there are the following regulations in the Financial Investment Services and Capital Markets Act. Duty to Explain : A financial investment business entity shall, whenever it makes an investment recommendation to an ordinary investor, explain the details of the financial investment instrument,the risks contingent upon the investment, and other matters specified by Presidential Decree with such sufficiency as to allow the ordinary investor to understand them. Principle of suitability : No financial investment business entity shall recommend an ordinary investor to make an investment, if the investment is deemed unsuitable for the investor in light of the investment purpose, status of property, experience in investment, etc. of the investor. The protection method about the OTC derivative investors is insufficient. The financial investment business explain the danger, worst result, change of the business partner, economic condition, solution of the dispute etc. The financial investment business explain considering the customer���s character. The clearing house becomes the seller to every buyer on the exchange and the buyer to every seller on the exchange through to it of all transactions that are dealt on the exchange. Through the novation of transactions to the clearing house, the counterparty risk that the exchange members would otherwise have to each other is eliminated. Our country will introduce the clearing house this year