Capital Market PPT Exam 2 PDF

Members: Baril, Lean Mae Bernales, Clarisse Anne Castro, Abigail Celeridad, Jericho Manuel Codilan, Christian Don Girozaga, Alyssa Bianca Ibrahim, Razna Layese, Stephanie Lomanta, Rizel Anne Montecillo, Julito Macadine, Geraldine Saripada,...

Members: Baril, Lean Mae Bernales, Clarisse Anne Castro, Abigail Celeridad, Jericho Manuel Codilan, Christian Don Girozaga, Alyssa Bianca Ibrahim, Razna Layese, Stephanie Lomanta, Rizel Anne Montecillo, Julito Macadine, Geraldine Saripada, Janice Socias, Lenie Taotao, Jaella Vaquilar, John Nestor Ybañez, Kris Lyn 02 LEARNING Understand Money and Capital Market 01 OBJECTIVES Instruments. By the end of the class you 02 Learn the significance of economic indicators will be able to: and their impact on capital markets. 03 Explore Debt Markets 04 Examine Money Markets 05 Analyze Derivatives Markets 03 Introduction to Financial Markets Financial markets are systems where financial instruments like stocks and bonds are traded, providing a platform for capital allocation and economic growth.  Current Landscape of the Financial Market in the Philippines (2024) As of 2024, the financial market in the Philippines is experiencing robust growth driven by increased investments and digital transformation, with the Bangko Sentral ng Pilipinas actively managing interest rates to combat inflation while fostering financial inclusion through regulatory reforms and fintech innovations; however, challenges such as high public debt and economic uncertainties remain significant concerns for stakeholders. Types of Financial Markets Primary markets - markets in which corporations raise funds through new issues of securities. Secondary markets - markets that trade financial instruments once they are issued. Money markets - markets that trade debt securities or instruments with maturities of less than one year. Foreign exchange markets - markets in which cash flows from the sale of products of assets denominated in a foreign currency are transacted. Derivative markets - markets in which derivative securities trade. Primary and Secondary Market Transfer of Funds Time Line 03 Money Markets (Short-Term Liquidity) Money markets deal with short-term financial instruments that typically have maturities of one year or less. These markets are essential for providing liquidity to businesses, governments, and financial institutions. Common money market instruments include Treasury bills, commercial paper, certificates of deposit, and repurchase agreements. Capital Markets (Long-Term Funding) Capital markets, on the other hand, are concerned with longer-term securities that typically have maturities of more than one year. These markets provide a platform for raising long-term capital, which is vital for business expansion, infrastructure projects, and long-term investments. Key instruments in capital markets include stocks (equities), bonds (debt securities), and mutual funds.  Money versus Capital Market Maturities The timeline classifies securities based on their maturity periods. Money market securities have short maturities, typically under one year, while capital market securities like notes and bonds have longer terms, ranging from 1 to 30 years. Stocks, as part of the capital market, have no specified maturity, representing perpetual investments MONEY MARKET INSTRUMENTS 01 TREASURY BILLS 02 CERTIFICATE OF DEPOSIT 03 COMMERCIAL PAPER MONEY MARKET INSTRUMENTS 04 REPURCHASE AGREEMENT 05 BANKERS ACCEPTANCE 07 Treasury bills short-term government securities sold at a discount from face value. used by governments to manage their liquidity needs and fund short-term expenses. Certificate of Deposit Time deposits offered by banks with a fixed interest rate for a specific period. The funds raised by banks through CDs contribute to their overall capital. 07 Commercial Paper Unsecured, short-term debt issued by companies to finance their short-term liabilities. it is not supported by anything but the issuers promise to pay 07 Repurchase agreement a contractual arrangement between two parties, where one party agrees to sell securities to another party at a specified price with a commitment to buy the securities back at a later date for another (usually higher) specified price. Bankers Acceptance The banker's acceptance is a form of payment that's guaranteed by a bank rather than an individual account holder.  CAPITAL MARKET INSTRUMENTS BONDS STOCK MORTGAGE TREASURY BONDS STATE LOCAL GOVERNMENT BOND PHILIPPINE GOVERNMENT AGENCY BONDS BANK AND CONSUMER LOANS 07 Bonds bonds are debt instruments that governments or corporations issue to raise capital. Investors purchase bonds, effectively lending money in exchange for periodic interest payments and the return of the bond's face value at maturity. Stock stock refers to shares of ownership in a company. When you buy stock, you essentially purchase a piece of that company, entitling you to a portion of its assets and earnings. Stocks are a key component of equity financing and can be traded on stock exchanges. MORTGAGES A mortgage is a loan used to purchase real estate, where the property serves as collateral for the loan. Borrowers agree to repay the loan amount, plus interest, over a specified period, typically through monthly payments. If the borrower fails to make payments, the lender can take possession of the property through foreclosure. Mortgages are a common way for individuals to finance home purchases. TREASURY BONDS Treasury bonds are long-term debt securities issued by the Department of the Treasury to finance government spending. They typically have maturities of 10 to 30 years and pay interest semiannually, with the principal returned to investors at maturity. STATE LOCAL GOVERNMENT BOND State and local government bonds, often referred to as municipal bonds or "munis," are debt securities issued by states, cities, or other local government entities to raise funds for public projects, such as infrastructure, schools, and hospitals. These bonds generally offer tax-exempt interest income to investors, making them an attractive investment option for those in higher tax brackets. PHILIPPINE GOVERNMENT AGENCY BONDS Philippine government agency bonds are debt securities issued by government- owned and -controlled corporations (GOCCs) or government agencies to fund specific public projects, such as infrastructure and social services. BANK AND CONSUMER LOANS Bank loans are financial products offered by banks to individuals or businesses, typically for specific purposes like purchasing a home, financing a car, or funding business operations. Consumer loans are a type of bank loan specifically designed for personal use, such as credit cards, auto loans, or personal loans, often characterized by fixed terms and interest rates. Both types of loans require repayment over time, usually with interest. 08 Role of How banks, insurance Financial companies, and mutual funds participate in these markets. Institutions  Banks Underwriting and Wealth Risk Management Issuing Securities Management and and Hedging Banks, particularly investment Asset Management Services banks, underwrite new Many banks operate wealth Banks offer derivative products securities and help companies and asset management and other financial instruments go public through Initial Public divisions, where they pool to help clients manage financial Offerings (IPOs) or issue new funds from individual and risks (such as interest rate risk debt or equity. They assess the institutional investors to invest or currency risk). By creating value of the securities, buy in a diversified portfolio of custom hedging strategies, them from the issuing assets. They help clients invest banks allow clients to protect company, and then sell them to in capital markets and provide themselves against price investors. tailored financial solutions. fluctuations.  Insurance Companies Long-Term Capital Underwriting and Providing Financial Provision Risk Transfer Stability Insurance companies collect Insurance companies The financial stability that premiums and build reserves facilitate risk transfer in insurance companies to pay future claims, which capital markets through the provide helps to stabilize gives them access to underwriting of insurance capital markets, as they are substantial capital. Given products. By underwriting able to continue investing their long-term obligations, policies, they absorb certain steadily even in times of they invest these funds in risks, allowing companies to economic stress, unlike assets like bonds, equities, take on projects or many other institutional real estate, and alternative investments they might investors. investments. otherwise avoid.  Mutual Funds Pooling of Capital Diversification and Sustainable and Mutual funds gather money Risk Management Impact Investing from numerous individual Many mutual funds offer investors, which allows even For capital markets, mutual sustainable or socially small investors to access a funds’ diversified investment responsible investment (SRI) diversified portfolio and strategies contribute to market options, targeting companies participate in capital markets stability, as their portfolios are that meet specific with lower individual less sensitive to individual environmental, social, and investment thresholds. This stock or bond volatility. governance (ESG) criteria. This enables investors to achieve focus on responsible investing greater diversification and encourages companies to benefit from professional adopt sustainable practices. management. SUMMARY Banks are key players in both money and capital markets 01 through lending, borrowing, issuing securities, and trading. Insurance companies primarily operate in capital markets by 02 investing long-term funds but also maintain liquidity through money markets. Mutual funds facilitate investment in both short-term and long- 03 term markets, offering diversified portfolios to investors. Their combined activities help ensure liquidity, stability, and efficiency in financial markets, contributing to economic growth and development. 10 Economic Indicators and Their Role in Capital Markets 16 Economic Indicators An economic indicator is a piece of economic data, usually of macroeconomic scale, that is used by analysts to interpret current or future investment possibilities. 16 Key Economic Indicators Gross Domestic Product (GDP)- This is the total market value of all final goods and services produced within a country's borders in a specific period. Inflation Rate- The rate at which the general price level of goods and services rises over time. Unemployment Rate- This is the percentage of the labor force that is unemployed and actively seeking work. Interest Rates- These are the costs of borrowing money. They influence investment, consumption, and economic activity. 16 Impact on Capital Markets Economic indicators have a profound impact on investor behavior and the overall performance of capital markets. Investment Decisions: Investors use economic indicators to assess the risk and potential return of various investments. Monetary Policy: Central banks use economic indicators to guide monetary policy decisions, such as interest rate adjustments. Business Strategies: Businesses use economic indicators to make strategic decisions about pricing, production, and investment. 16 Interest Rate Movements Interest rate and Bond Yields: When interest rates rise, new bonds offer higher returns, making older bonds with lower returns less appealin, which lowers their price. When interest rates fall existing bonds with higher returns become more attractive, increasing their prices. Impact on stock price: Borrowing Cost: Higher rates increase the cost of borrowing for companies , potentia reducing profit. Investment Alternatives: As bond yield rise, Investors may shift their money froms st to bonds, seeking safer returns. Consumer Spending: Higher interest rates can lead to reduced consumer spending a ( like mortgages and car loans) become more expensive, impacting company revenues 16 Role of central banks and government policies in shaping economic indicators. Monetary Policy GDP: Lower interest rates encourage borrowing and investment, leading to increased economic activity and higher GDP growth. Conversely, higher interest rates can slow down economic growth. Inflation: Central banks often adjust interest rates to target a specific inflation rate. Higher interest rates can help curb inflation by reducing consumer spending and investment. Interest Rates: The central bank's interest rate policy directly sets the base rate for the economy, influencing the cost of borrowing for individuals and businesses. Unemployment Rates: Monetary policy can indirectly affect unemployment. For instance, lower interest rates can stimulate economic growth, leading to increased job creation and lower unemployment. 16 Role of central banks and government policies in shaping economic indicators. Fiscal Policy GDP: Increased government spending can directly boost GDP by injecting money into the economy. Tax cuts can also stimulate economic growth by increasing disposable income and encouraging spending. Inflation: Excessive government spending can lead to demand-pull inflation, as increased spending outpaces the economy's capacity to produce goods and services. Interest Rates: Government debt can influence interest rates. If a government borrows heavily, it can increase demand for loanable funds, potentially pushing interest rates up. Unemployment Rates: Fiscal policy can directly affect unemployment. Government spending on infrastructure projects or public services can create jobs, while tax cuts can encourage businesses to hire more workers.  DEBT MARKETS DEBT MARKETS A.K.A. Bond Market refers to financial markets where debt instruments such as bonds, notes, and mortgages are traded. These markets play a crucial role in the financial system, allowing institutions and governments to raise funds by issuing debt to investors. Debt markets are vital for allocating capital and providing liquidity and risk-sharing, which helps secure the financial system. They enable borrowers to finance projects or operations while investors earn returns through interest payments. TYPES OF DEBT INSTRUMENTS Financial Markets and Institutions by Saunders and Cornett Bonds Debentures Notes Loans BONDS These are long-term debt instruments corporations, municipalities, or governments issued to finance projects. They pay fixed interest (coupons) and return the principal on maturity. Bonds can be purchased through brokers, financial institutions, or government websites. DEBENTURES A type of bond not secured by physical assets. They rely on the issuer’s creditworthiness and can be purchased from corporate bond markets or financial institutions. LOANS Banks or financial institutions typically provide borrowed capital to individuals or businesses, which is repaid with interest over time. Loans are available at banks, credit unions, and online lenders. NOTES Short-term debt securities, often maturing in 1-10 years. Like bonds, they provide fixed interest payments and are available through financial institutions or brokers. BOND MARKET FUNCTIONALITY How bonds are issued, traded, and priced Bond Trading Pricing Issuance BOND ISSUANCE Bonds are issued through public offerings or private placements. Corporations or governments create bonds to raise funds, providing investors with the bond’s face value, interest rate (coupon), and maturity date. Bonds are sold at par, premium, or discount based on prevailing interest rates. TRADING Bonds are traded in secondary markets, either OTC or on exchanges. Bond trading allows investors to buy or sell bonds before they mature. PRICING Interest rates, credit ratings, and market demand influence bond prices. Prices move inversely to interest rates, and bonds are priced based on present value calculations of future cash flows.  RISK IN DEBT MARKETS Credit Risk Default Risk Interest Rate Risk Credit risk is the probability The probability that a Interest rate risk is the of a financial loss resulting borrower will fail to make probability of a decline in from a borrower's failure to full and timely payments of the value of an asset repay a loan. principal and interest resulting from unexpected fluctuations in interest rates.  BOND PRICING AND YIELDS Bond Pricing Is the method of determining the fair value or price of a bond based on its future cashflows, which include periodic interest payments (coupon payments) and the repayment of the bond’s face value (principal) at maturity. The price of a bond is influenced by several factors, primarily the bond’s coupon rate, the interest rates in the market, and the time remaining until the bond’s maturity. Bond Pricing Formula: The price of a bond is the present value of its future cash flows (coupons and face value). WHERE: C = Coupon payment r = Discount rate (Yield to Maturity, YTM) F = Face value of the bond t = Time period T = Maturity period Example of Bond Pricing: Problem: You are considering purchasing a 3-year bond that has a face value of ₱1,000. The bond pays an annual coupon at a rate of 5%, which means you will receive ₱50 per year. The current market interest rate (Yield to Maturity, YTM) is 6%. What is the price you should pay for this bond today? Solution: WHERE: C = ₱50 (annual coupon payment) r = 0.06 (market interest rate YTM) F = ₱1,000 (face value of the bond) T = 3 (maturity period in years) Therefore, the price of the bond is approximately ₱973.27 Current Yield The current yield is a bond’s annual coupon payment as a percentage of its current market price. Current Yield Formula: WHERE: C = Annual coupon payment P = Current bond price Example of Current Yield: Problem: An investor purchases a bond for ₱973.30, and the bond pays an annual coupon of ₱50. What is the current yield? Solution: WHERE: C = ₱50 (Annual coupon payment) P = ₱973.30 (Current bond price) Thus, the current yield is 5.14%.  Yield to Maturity (YTM) Yield to Maturity (YTM) is the total return an investor can expect to earn if they hold a bond until it matures, assuming all payments are made as scheduled. YTM Formula: Where: F = Face value P = Current price T = Years to maturity C = Annual coupon payment Example of Yield to Maturity: Problem: A bond with a face value of ₱1,000 has a coupon payment of ₱50. It is currently priced at ₱973.30, with 3 years to maturity. What is the bond's YTM? Solution: Where: F = ₱1,000 Face value P = ₱973.30 Current price T = 3 Years to maturity C = ₱50 Annual coupon payment Thus, the YTM is 5.97%.  Yield to Call (YTC): Yield to Call (YTC) is the yield an investor earns if the bond is called (redeemed by the issuer) before it matures, often at a predetermined date and price. YTC Formula: Where: Call Price = Price at which the bond can be called P = Current price Tc​= Time until the bond can be called C = Annual coupon payment Example of Yield to Call: Problem: A bond has a face value of ₱1,000, with a coupon of ₱50 annually. The bond can be called in 2 years at a call price of ₱1,020. The current price is ₱1,000. What is the yield to call (YTC)? Solution: Where: Call Price = ₱1,020 Price at which the bond can be called P = ₱1,000 Current price Tc​= 2 (Time until the bond can be called) C = ₱50 Annual coupon payment Thus, the YTC is 5.94%. Money Market  DIFFERENT YIELDS ON MONEY MARKET SECURITIES 1. Bond Equivalent Yields - is the rate used to calculate the present value of an investment. For money market securities, the bond equivalent yield is the product of the periodic rate and the number of periods in a year.  For example: Suppose you purchase a money market security for $950. The face value of the security is $1,000, and it will mature in 30 days. formula: where; 2. Effective Annual Return - The effective annual return (EAR) is the actual annual rate of return on an investment, taking into account the effects of compounding interest.  For example: Suppose you can invest in a money market security that matured in 75 days and offers a 3 percent nominal annual interest rate (i.e bond equivalent yield). formula: 3. Discount yield - is the expected annual percentage rate of return earned on a bond when it is sold at a discount on its face value. Also known as bank discount yield (BDY).  For Example: A corporate investor purchases a 120-day commercial paper for $95,000. The face value of this commercial paper is $100,000. The investor wants to determine the discount yield to understand the return on this investment. formula: 4. Single Payment Yield - used to calculate interest on money market instruments (commonly used in negotiable Certificate of Deposits). They only pay at the maturity of the security. For example  5.Treasury Bill Yields - Used to calculate yields on a T-Bill. For Example: Suppose that you purchase the T-bill maturing on March 26, 2020 for $9,961.87. The T-bill matures 90 days after the quote date, December 27, 2019, and has a face value of $10,000. The T-bill’s is calculated as: cont:  6. Repurchase agreements - are transactions or short term loans in which two parties agree to sell and repurchase the same security with an agreement to repurchase them at a predetermined price on a specified date. For example, JP Morgan Chase buys $10,000 of T-bond from Bank of America and agreed to repurchase it after 5 days with an interest. Repurchase Agreement Yields – The yield on repurchase agreements is calculated as the annualized percentage difference between the initial selling price of the securities and contracted repurchase price, uses 360-day year For example: JP Morgan Chase enters a repurchase agreement in which it agreed to buy fed funds from Bank of America at a price of $10,000,000 with the promise to sell these funds back at a price of $10,291.67 after 5 days. The yield on this repo to the bank is calculated as follows: 7. Commercial Paper Yields These are the returns that investors receive from purchasing commercial paper, which is a short-term unsecured promissory note issued by companies to raise funds. It is the annualized percentage difference between the price paid for the paper and the par value using a 360-day year.  For Example: Suppose an investor purchases 90-day Commercial Paper with a par value of ₱1,000.00 for a price of ₱950.00. Formula: where; The bond equivalent yield (be) is: The EAR on the commercial paper is: 8. Negotiable CD Yields Negotiable CD rates are negotiated between the bank and the CD buyer. Large, well-known banks can offer CDs at slightly lower rates than smaller, less well-known banks. Negotiable CDs are single-payment securities. Scenario: You purchase a negotiable CD with a face value of $1,000,000. The CD has an interest rate of 3% and matures in 1 year. At maturity, you will receive the face value plus interest. Calculation: Interest Earned: Interest = Principal × Rate = 1,000,000×0.03 = 30,000 Total Amount at Maturity: Total = Principal + Interest = 1,000,000+30,000 = 1,030,000 Yield: In this case, since the CD was held to maturity, the yield is simply the interest rate of 3%. If you decide to sell the CD before maturity, the yield can vary depending on market conditions at the time of sale. Suppose market interest rates rise to 4% after six months: Interest Earned: Interest = Principal × Rate = 1,000,000×0.04 = 40,000 Total Amount at Maturity: Total = Principal + Interest = 1,000,000+40,000 = 1,040,000 Your CD is now less attractive than new CDs issued at 4%. If you sell your CD, you may need to sell it at a discount to attract buyers, affecting your actual yield. Derivatives DERIVATIVE SECURITY MARKETS are markets in which derivative securities trade. Derivative Securities a financial security (such as future contract, option contract, swap contract, or mortgage- backed security) whose payoff is linked to another, previously issued security such as security traded in capital or foreign exchange markets. SPOT MARKETS A spot contract is an agreement to transact involving the immediate exchange of assets and funds. Spot transactions occur because the buyer of the assets believes its value will increase in the immediate future (over the investor’s holding period) FORWARD MARKETS: FORWARD CONTRACTS A forward contract is an agreement to transact involving the future exchange of a set amount of assets at a set price. Market participants take a position in forward contracts because the future (spot) price or interest rate on an asset is uncertain Can be based on a specified interest rate (e.g., LIBOR)rather than a specified asset (called forward rate agreements) Often involve underlying assets that are non standardized, because the terms of the contract are negotiated individually between the buyer and seller. FUTURES MARKETS: FUTURES CONTRACTS A futures contract is an agreement to transact involving the future exchange of a set amount of assets for a price that is settled daily. Very similar to a forward contract One difference is that the default risk on futures is significantly reduce by the futures exchange guaranteeing to indemnity counterparties against credit or default risk Another difference relates to the contract’s price, which in afuture is marked to market daily Unless a systematic financial market collapse threatens an exchange itself, futures are essentially risk-free. Uses of Derivatives: Hedging: Involves using derivatives to protect against potential losses in an investment. For example, an investor may use options to secure a specific price for a stock, thereby minimizing risk if the stock's value decreases. Speculation: Investors use derivatives to bet on future price movements, seeking to profit from changes in the market. Risk Management in Capital Market: Organizations use derivatives to manage and mitigate various financial risks, such as interest rate fluctuations or currency exchange rate changes.  Types of Derivatives Futures Contracts to buy or sell an asset at a predetermined price at a specified time in the future. Primarily used by investors to hedge against price fluctuations or speculate on price movements. Options Contracts that give the holder the right, but not the obligation, to buy or sell an asset at a specified price before a certain date. Used for hedging or speculative purposes. They offer the flexibility to capitalize on market movements while limiting potential losses.  Types of Derivatives Swaps Contracts in which two parties exchange cash flows or other financial instruments. Commonly used to manage interest rate risk or currency exposure.  Risk in Derivatives Market Liquidity Risk It is the risk of being unable to quickly buy or sell a derivative without causing significant price changes Counterparty Risk A risk that the other party in a derivatives contract will fail to fulfill their obligations.  Risk in Derivatives Market Credit Risk It is the risk of loss due to a counterparty’s inability to repay or meet their financial commitments. Market Risk It is the risk of financial loss resulting from adverse movements in market prices or interest rates affecting derivative values.  Risk in Derivatives Market Operational Risk A risk of loss arising from inadequate or failed internal processes, systems, or external events that impact trading operations. Price Risk It is the risk associated with potential losses due to fluctuations in the market price of the underlying asset  Risk in Derivatives Market Legal Risk Risk of financial loss resulting from legal disputes, contract issues, or non- compliance with regulations. Currency Risk The risk of losses arising from changes in exchange rates affecting derivatives linked to foreign currencies.  Risk in Derivatives Market Leverage Risk Risk experiencing amplified losses or gains due to the use of borrowed funds in derivatives trading. Systematic Risk Risk of loss that affects the entire market or system, often due to macroeconomic events or conditions.  REGULATION OF DERIVATIVES how regulators manage and oversee the derivatives market to prevent systematic risks. Philippines Derivatives Regulation Timeline Pre-1990s: Minimal regulation; basic trading only. 1990s: Asian Crisis prompts BSP oversight. 2000s: BSP and SEC establish regulatory roles. 2010s: Post-2008 crisis, stricter rules for risk. Today: Focus on transparency and global standards. Key Regulatory Bodies of Derivatives International Level International Organization of Securities Commissions (IOSCO) IOSCO is an international body that sets standards for securities regulators worldwide. It has developed a regulatory framework for derivatives trading that aims to promote transparency, mitigate risks, and protect investors. International Swaps and Derivatives Association (ISDA) ISDA is a global trade association for the derivatives industry. It develops standard contractual language for derivatives transactions, including the ISDA Master Agreement, which is widely used in the OTC derivatives market. ISDA also works with regulators to promote best practices and reduce systemic risk Key Regulatory Bodies of Derivatives United States Commodity Futures Trading Commission (CFTC) The CFTC is the primary regulator for derivatives in the US. It oversees futures, options, and swaps, including setting margin requirements, regulating clearinghouses, and enforcing anti-manipulation rules. Financial Industry Regulatory Authority (FINRA) FINRA is a self-regulatory organization that oversees broker-dealers and other financial institutions. It plays a role in regulating derivatives by enforcing rules on trading practices, margin requirements, and customer protection. Key Regulatory Bodies of Derivatives United States National Futures Association (NFA) The NFA is a self-regulatory organization that oversees futures commission merchants (FCMs) and other market participants. It plays a role in regulating derivatives by enforcing rules on trading practices, margin requirements, and customer protection. Philippines Securities and Exchange Commission (SEC) The SEC is the primary regulator for securities in the Philippines, including derivatives. It plays a role in registering derivatives products and overseeing brokers involved in derivatives trading. Key Regulatory Bodies of Derivatives Philippines Bangko Sentral ng Pilipinas (BSP) BSP is the central bank of the Philippines and regulates the financial derivatives activities of banks. It sets guidelines for risk management, client sustainability, and other aspects of derivatives trading. Regulatory Measures Mandatory Clearing Many standardized derivatives contracts are now required to be cleared through central counterparties (CCPs). CCPs act as intermediaries, guaranteeing the performance of each party to a trade, reducing counterparty risk. Margin Requirements CCPs and regulators require market participants to post margin - a deposit of cash or securities - to cover potential losses on their derivatives positions. This helps to mitigate the risk of default. Regulatory Measures Reporting Requirements All derivatives transactions must be reported to trade repositories (TRs). This increases transparency in the market and allows regulators to monitor trading activity. Enhanced Business Conduct Standards Regulators have imposed stricter business conduct standards on derivatives dealers, including requirements for risk management and transparency. Thank you!!