You’ve checked the paperwork, completed a test drive, given the vehicle the once over and now satisfied, you hand over payment to take possession of your second handYou’ve checked the paperwork, completed a test drive, given the vehicle the once over and now satisfied, you hand over payment to take possession of your second hand car.

All of us have experience of transacting over-the-counter (OTC) in our everyday lives whether it is cars, houses or antiques. Put simply, as individuals, we all have bespoke requirements which can only be met through bilateral transactions.

The value and necessity of OTC transactions in any economy is proven every day through the huge volumes in markets like second hand cars and housing.

The same is true of wholesale financial markets.

End users of OTC markets, such as governments, companies and pension funds require bespoke products to manage and hedge their risks. For example, an airline may use oil forward contracts to manage price fluctuations in jet fuel.

Testament to their vital function is the notional value of the OTC markets, which at $590 trillion is about 10 times bigger than exchange traded ones. OTC derivatives are here to stay.

That’s not to say that exchange-traded markets do not have equally as vital a role. For good reason, there is a symbiotic relationship between OTC and exchange traded markets. The former provide a venue for transactions with timings and terms which can be individually negotiated, whereas the latter enables the transacting of highly liquid, strictly standardised product contracts. Both markets are necessary and have disparate reasons to co-exist.

So, how best to improve the safety and transparency of derivatives markets? Through collaboration with the industry, policymakers in Brussels have provided useful guidelines for future legislative action, but there is further work that needs to be undertaken to develop them in more detail.

For example, a definition of “standardisation” is needed to identify which OTC products might migrate into clearing, and to determine to which uncleared OTC products capital charges might apply to and at what level.

Inter-dealer brokers, having already improved many post-trade processes and infrastructures in the OTC markets, are well placed to work with policymakers to answer many of these questions.

While finding consensus on these topics is vital if we are to move forward, the point which seems to have been missed is that solving infrastructure issues alone, or in isolation, will not prevent a future financial crisis. When it comes to increasing the safety of the financial system and in particular, OTC markets, there are three streams which, although interconnected, need to be addressed.

First is the issue of bank capital. This includes both the level of capital that might be applied to uncleared OTC derivative products and the overall capital adequacy requirements for banks. This role should be left to the internationally accepted Basel Committee for Banking Supervision (BCBS) which will undertake the role under a revised Basel II Accord.

The revision of Basel II is underway. This involves the recalculation of “Pillar I” metrics through the recalibration of capital adequacy for market, credit and operational risk, along with changes to the “Pillar II” supervisory review process.

Second is the issue of market infrastructure - like clearing. There has been some solid progress in Brussels and Washington on infrastructure issues relating to derivatives such as the use of central clearing to monitor aggregate exposures of all market participants and as a means of mitigating counterparty risk.

If these measures are to succeed, it is vital to ensure that all trading venues provide open and non-discriminatory access to central clearing, to endorse market integrity and empower the end-users of derivatives.

The third area pertains to the issue of national and global systematic risk. As regards the former, this is typically the remit of either the national regulator or central bank to supervise and monitor.

If we take the UK as an example, we are certainly beginning to see progress in this area. The setting of rules and parameters for global systemic risk is the role of the G20, which in the immediate aftermath of the credit crisis, appears to have promoted broadly sensible policies which should prove essential to global economic recovery.

So where do we find ourselves? It has probably become clear to policymakers that reforming the financial system is an even bigger and more complicated task than it had originally appeared. The separate groups of policymakers responsible for the three streams should be encouraged to achieve the specific objectives required in each area. And that work must be allowed to mature before we declare the financial system a safer place.

David Clark is chairman of the Wholesale Market Brokers Association, which represents the world’s nine largest inter-dealer brokers in Europe