Commonly Used Terms in Derivative Market
February 12, 2025
The nature of investment banking is such that investment bankers are supposed to work very closely with their clients. In due course of their work, they are often exposed to information that is not public. This material information is not known to the larger public. Hence, this creates a situation in which investment bankers have […]
When the word bankruptcy is used, the immediate image conjured is that of a company that is trying hard to stay afloat. However, external parties such as creditors are pushing for the immediate repayment of debts causing the company to become insolvent. The average person thinks of bankruptcy as an auction type event wherein the […]
In the previous article, we have already studied about the concept of venture debt. We know that venture debt can prove to be a viable alternative for a start-up company that is looking to raise cash for a relatively short period of time. We also know how venture debt is different as compared to venture […]
Amazon and Netflix are two of the most profitable firms in the entire world. For instance, last year, Amazon alone made over $12 billion in profits. However, it paid $0 in taxes! To make matters worse, the company was owed money in the form of tax rebates. This means that the federal government was actually […]
What is Financial Modeling and How Does it Help Financial Professionals? Ask any banker or for that matter any financial professional what financial modeling is and they would reel off cost benefit analysis, cash flow projections, Net Present Value, expected rate of return, and break even points in a single breath. Further, for those of […]
The derivatives markets all over the world have been under fire after the 2008 crisis. There is increasing clamor and an increasing number of people are asking for the regulation of derivatives. In this article, we will study about the efforts undertaken to bring about this regulation as well as the challenges that are faced by such regulation.
The modern day derivatives were introduced into the financial system around the 1980’s. However, derivatives have not faced any meaningful regulation ever since. The over the counter derivatives markets have eluded regulation for over three decades. The reasons that they gave for eluding this regulation are as follows:
All the reasons that were used by the derivatives markets to avoid regulation had simply fallen apart during the period of crisis. It was during this time that the voices to increase the regulation started being raised one more time.
The first question that arises is that banks, insurance companies and other financial services companies that offer derivatives are under regulations that mandate them to have minimum capital requirements met. Then why is that more regulation is required for derivatives markets?
There are two primary reasons for this:
Therefore, the regulation of derivatives markets in the world is a much needed phenomenon.
The biggest challenge facing derivative regulation is the complexity of the products being offered. In most countries where any form of legislation has been enforced on derivatives, it is suboptimal and non transparent. This is because the regulators have to understand complex products and the complex models that are used to value these products at different time intervals. Once these models are created, the difficulties related to collating of data in the over the counter market also arises. Then the regulators would be expected to undertake real time measures to prevent any crisis from arising. All these factors combine to make regulation of derivatives so challenging.
Some of the proposed measures for regulating derivatives are as follows:
The regulation of derivatives is thus a burning issue. However, there is a lot of complexity that needs to be surmounted before anything meaningful is achieved. At the present moment, the achievements are negligible.
Your email address will not be published. Required fields are marked *