Financial derivatives are widely used throughout the economy by financial firms, corporations, farmers, and investors to serve a number of different purposes. A broad set of factors are responsible for the 2008-2009 financial crisis, but derivatives played a key role in the crisis by fueling a housing bubble and enabling large-scale systemic risk in the financial system. Congress plays a major role in the derivatives market by passing laws and regulations that define the nature of derivatives market activity and through its oversight role over the major regulators of the derivatives markets. The 2008-2009 financial crisis spurred policymakers from a range of countries, spearheaded by the G-20, to commit their countries to reforming domestic and international rules governing the over-the-counter (OTC) derivatives markets. Most assessments generally agree that a broad set of factors played a role in the financial crisis and in the ensuing sovereign debt crisis in Europe. However, actions by investors in the derivatives markets likely aggravated the financial crisis, required billions in government assistance to American International Group, Inc. (AIG) and other financial firms to cover losses associated with credit default swaps (CDS), and played a key role in destabilizing financial markets. In addition, public and congressional attention has continued to focus on derivatives markets as a result of the key role derivatives played in worsening Greece's financial crisis and the roughly $6 billion in derivatives-trading losses in 2012 reported by JP Morgan. According to standard finance theory, derivatives markets benefit financial markets and the wider economy by improving the pricing of risk, adding to liquidity, and helping market participants manage their risks. In particular, derivatives are used by financial firms, corporations, farmers, and investors to hedge against, or speculate on, changes in prices, rates, or indices, or even on events such as the potential defaults on debts. As a result, they have added to liquidity and been instrumental in expanding financial opportunities for a broad range of market participants, particularly in mitigating risks associated with changes in exchange rates and interest rates. Nevertheless, OTC derivatives can add substantial risk to financial markets due to the very nature of derivatives. OTC derivatives contracts often involve lengthy commitments during which time a position can potentially generate a substantial counterparty credit exposure. Also, since OTC derivatives often require a small initial outlay of cash, small changes in the value of the underlying securities of the derivatives can abruptly expand the potential liabilities and raise counterparty credit risk dramatically during periods of market turbulence. In addition, derivatives markets and transactions span national borders and national regulators. Consequently, troubles in derivatives markets can reverberate far beyond the original source of the problem. The Financial Crisis Inquiry Commission concluded that derivatives contributed to the 2008-2009 financial crisis in three major ways. First, credit default swaps were instrumental in fueling the securitization of mortgages and mortgage-backed securities and in the subsequent housing bubble. Next, credit default swaps were essential in creating synthetic collateralized debt obligations (CDO), or financial instruments that served as bets on the performance of real mortgage-backed securities, which amplified the losses from the collapse of the housing bubble by allowing multiple bets on the same securities and helped spread the losses throughout the financial system. Finally, once the housing boom ended, derivatives were at the center of the crisis due to (1) concerns that losses associated with derivatives would trigger cascading losses throughout the global financial system; and (2) the lack of transparency concerning the overall size of the derivatives market and the extent of derivatives transactions between systemically important financial institutions that directly added to uncertainty and panic in global financial markets. Perhaps the best known example of problems stemming from large OTC derivatives exposure in the financial crisis came from the near-collapse of the large conglomerate American International Group, Inc. (AIG), which wrote about $1.8 trillion worth of OTC derivatives contracts for credit default swaps. These credit default swaps guaranteed payment if certain mortgage-backed securities defaulted or experienced other "credit events." Many of AIG's contracts did require it to post collateral as the credit quality of the underlying securities (or AIG's own credit rating) deteriorated, but AIG did not post an initial margin, as this was deemed unnecessary because of the firm's triple-A rating. As the subprime crisis worsened, AIG was subjected to margin calls that it could not meet. To avert bankruptcy, with the risk of global financial chaos, the Federal Reserve and the Treasury put tens of billions of dollars into AIG, the bulk of which went to its derivatives counterparties. The AIG case illustrates two aspects of OTC markets that are central to derivatives reform proposals. First, as noted above, AIG was able to amass an OTC derivatives position so large that it threatened to destabilize the entire financial system when the firm suffered unexpected losses, and the risks of default to AIG derivatives counterparties grew. In a market with mandatory clearing and margin, in which AIG would have been required to post an initial margin to cover potential losses, there is a stronger possibility that AIG would have run out of money long before the size of its position had reached $1.8 trillion. Second, because OTC contracts were not reported to regulators, the U.S. Federal Reserve (the Fed) and the U.S. Treasury Department lacked information about which institutions were exposed to AIG, and the size of those exposures. Uncertainty among market participants about the size and distribution of potential derivatives losses flowing from the failure of a major dealer was a factor that exacerbated the "freezing" of credit markets during the peaks of the crisis, and made banks unwilling to lend to each other. A basic theme in derivatives reform proposals is to get the OTC market to act more like the exchange-traded futures market—in particular, to have bilateral OTC swaps cleared by a third-party clearing organization. Generally, OTC derivatives are used in a variety of ways, including hedging, investing, exploiting arbitrage opportunities, and position-taking. OTC derivative instruments are generally referred to as swaps. Yet swaps have widely differing characteristics and degrees of standardization, and can include bets on a number of different types of assets. The global OTC derivatives markets are dominated by five different types of swaps: foreign exchange swaps; interest rate swaps; equity-linked swaps; commodity swaps; and credit default swaps, as indicated in Table 1 . At the end of 2011, the total notional amounts outstanding of OTC derivatives amounted to $647.8 trillion, down about 8% from the $706.9 trillion in derivatives recorded in June 2011. The notional amount, also called the reference amount, refers to the underlying value of the assets that are being bet on through a derivatives contract. Figure 1 depicts the relative total sizes of the global derivatives market; world assets; world GDP; and the world's official reserves. It demonstrates that the size of the global derivatives market, in terms of notional value, tends to dwarf these other major categories. Financial markets that trade derivatives grew rapidly over the past decade and now serve large trades involving vast amounts of funds, as indicated in Table 2 . According to data published by the International Monetary Fund (IMF) and the Bank for International Settlements (BIS), global trading in OTC foreign exchange derivatives and OTC interest rate derivatives amounted to $567 trillion in 2011, or approximately nine times world gross domestic product (GDP) of $70 trillion. These data do not include trading in equity and commodity-linked derivatives, which likely would boost these numbers substantially higher. In addition, the total notional value, or the total gross nominal value of the underlying assets, of derivatives in 2011 was reported as being more than twice the size of the total value of all stocks, bonds, and bank assets, as indicated in Table 2 . The United States, with the largest gross domestic product (GDP) of any country (and about the same size as the EU's GDP) also had the largest single share of OTC interest and exchange rate derivatives trading in 2011—a share slightly greater than that of the Euro area—in terms of the notional value of the derivatives. The financial crisis of 2008-2009 exposed weaknesses in the OTC markets that contributed to the build-up of systemic risk and threatened to disrupt the functioning of international financial markets. OTC derivatives are traded by a large and diverse group of market participants, including banks, hedge funds, pension funds, other institutional investors, corporations, and government entities. This market, however, is dominated by a limited number of dealers. Such dealers provide liquidity to the market by selling derivatives contracts to customers and managing the resulting risk exposures through offsetting transactions in the underlying assets, exchange traded derivatives, and further trades with dealers and traders in OTC markets. These dealers are highly interconnected through a network of trades and, therefore, are highly exposed to spillover, or contagion, effects from turmoil in other parts of the markets. Such market disruptions can trigger a chain of credit-related losses which, in turn, could result in severe market disruptions and potentially a chain of defaults. According to the Financial Stability Board (FSB), these weaknesses include (1) the build-up of large counterparty exposures between particular market participants through collateralized debt obligations (CDOs) and credit default swaps which have not been appropriately risk-managed; (2) contagion risk arising from the interconnectedness of the OTC derivatives market participants; and (3) the limited transparency of overall counterparty credit risk exposures that can precipitate a loss of confidence and market liquidity in times of stress. In November 2008, as the heads of state of the G-20 nations met in Washington, DC, to respond to the financial crisis, they agreed to implement a number of reforms to address the perceived failures in the financial system.