Governing Derivatives after the Financial Crisis: The Devil is in the Details

S.G. Badrinath and Stefano Gubellini

San Diego State University

Problems worthy of attack

Prove their worth by hitting back.

—Piet Hein


Derivatives serve a number of functions in advanced economies. While their speculative uses appear periodically destabilizing, their benefits in hedging a range of risks are undoubtedly of value to the economic entities that utilize them. As derivative innovation has evolved, the frequency of financial setbacks has also increased. Both the stabilizing and destabilizing influences have magnified, from jump risk in credit derivatives to the globalization of risk management. Legal, accounting and regulatory bodies have attempted to balance these objectives, tilting towards one side or the other depending on the fervor with which deregulatory or regulatory motivations have dominated the prevailing social ethos. In this fashion, concerns about derivatives mimic the periodic generational discomforts with innovative ideas be they social, cultural or political.

This chapter evaluates recent financial regulation pertaining to derivatives. It describes the role of derivative products in securitizations, discusses the evolution of regulation and the challenges involved in implementing the recommendations of the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 (hereafter the “Dodd–Frank Act”) as it affects interest-rate swaps and credit default ...

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