A closer look at

So what are derivatives?

What do derivatives look like?

2 types (how theyre traded) Over the counter (OTC) Less transparent v.s. Exchange traded (ETD) Publicly traded =more transparent What theyre used for Hedging against risk Speculation Most problematic derivatives Collateralized Debt Obligations (CDOs) Credit Default Swaps (CDS)

How did this whole derivative market thing start?

Unregulated thanks to ISDA lobbying efforts (late 80s) Derivatives rose to prominence in 90s due to 2 factors: (1) deregulation and (2) innovation in financial instruments Only after 2008 financial crisis was there a move toward regulation

(2000) The Commodity Futures Modernization Act passed

(2004) CEO of Goldman Sachs convinces SEC to relax limits on leverage

The decline of the world economy

(2005) Rajan of IMF delivers paper warning financial development is putting global economy at risk

(2006) Investment banks aggressively bet against toxic CDOs

2007+ GLOBAL ECONOMIC CRISIS

and where we are now

Regulation is the only solution Crisis brought hedge funds & derivatives under the public international regulatory umbrella
Dodd-Frank July 2010 overhaul of financial regulatory

system U.S. and U.K. want to be the first to get in on the action Trading on an open exchange and the use of central counter party clearing houses is the new emerging norm from 2009 G20 commitments BUT

Political & Economic Interests Banks rely on derivatives for HUGE earnings = tensions between lobby groups and public interest Efforts to increase use of clearinghouses could put clearinghouses like the U.K.s at risk

Derivatives & Global Domination

Derivatives market worth $1,200 trillion today OTC derivatives market not subject to the same level of regulation as traditional securities market

Share of Derivatives Market

U.S.

U.K.

other countries e.g. Japan

Overview of Global Derivatives Issues

Entrenched Private Sector Interests Supervisory Agencies:

IOSCO recommended tighter regulations

2009 G20 Summit in Pittsburgh

World leaders commit to reforms

Primacy of the U.S:

Dodd-Frank Act = regulation of OTC derivatives.

Overview of Global Derivatives Issues continued

European interests:
new regulations requiring all E.U.-traded OTC

derivatives to be cleared through central counterparties (CCPs) *resistance from U.K.*

BRICS foray into derivative market:

cross-listing of benchmark equity index derivatives

allowing investors in one BRICS country to invest in any other BRICS countries in local currencies.

Derivatives through the U.K. lens

Worried about costs of regulation UK is a financial hub Derivatives regulation in U.K. 43% of global OTC market

Latest developments: Draft Financial Services (Banking Reform) Bill in the UK tries to regulate sale of derivatives

Debates in the derivatives world

Concerns that regulation may constrain the progress of the financial sector Controversy over the Dodd-Frank Act Regulation of derivatives by US is moving fast but regulators elsewhere are resisting

Possibility of overlap, E.U., Japan and U.K. are

trying to create their own regulations and are set to create their own rules

UK, EU and U.S. regulators over how to supervise Libor in the future