Abstract
A market-based financial system relies on the existence of prudential, organizational and protective regulations in order to preserve the safety and soundness of the financial system, to ensure its smooth functioning and to provide adequate protection to the users of financial services. The particular business characteristics of banks have important implications regarding the need for their regulation. The need for bank regulation, given the objective of maintaining confidence in the financial system, arises from the fact that banks are uniquely vulnerable to contagious illiquidity and insolvency collapse and their failures can cause severe negative social externalities. This paper describes the Czech derivatives market and discusses the latest approach of the Czech National Bank towards establishing a bank regulatory framework. To put these issues in context, background information is provided on the foreign exchange position of the Czech banking sector, CNB provisions and the foreign exchange market in the Czech Republic.
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