Over the Counter Derivatives Regulation
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 No Regulation Point of View
The modern day derivatives were introduced into the financial system around the 1980s. 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.
Why Regulation is Required in Derivatives Markets ?
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.
Why is Regulation Challenging ?
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.
Proposed Regulations for Derivatives
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.
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