Sovereigns

Hans J Blommestein

Many Organisation for Economic Cooperation and Development (OECD) sovereigns use over-the-counter (OTC) derivatives in their debt management activities. This chapter will present a simple framework to analyse the implications of the OTC derivatives regulatory reforms and debt management office (DMO) OTC development policies.

THE USE OF DERIVATIVES BY DEBT MANAGEMENT OFFICES

A survey among 33 OECD DMOs in the post-2008 crisis period revealed that:

• • most DMOs use derivatives, and a significant percentage intend to continue using them in the future; in fact, there are indications that a growing number of DMOs are planning to use these instruments; and
• • interest rate swaps (IRS) and cross-currency swaps (CCS) were by far the most commonly used instruments.

Why use derivatives?

There are three key reasons for the use of derivatives among sovereigns. First, a significant reason for the frequent and common use of IRS is their importance for domestic portfolio management; for example, countries that have duration targets tend to use derivatives. The frequent use of IRS is also associated with a higher ratio of domestic (currency) debt to total debt in