Reinventing Financial Regulation: A Blueprint for Overcoming Systemic Risk

CHAPTER 9

What to Do About Complex Financial Instruments

In 2014, at €700 trillion, the notional amount of outstanding derivative ­contracts that were traded over the counter¹ exceeded the size of the underlying cash markets by more than five times. This goes against the better instincts of many outside the financial sector. It seems an unnatural state where the tail is wagging the dog. None other than the successful investor Warren Buffet famously wrote in the 2002 annual report of his investment vehicle, Berkshire Hathaway, “In my view, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”² When suspicions over the lethal nature of derivatives were seemingly vindicated by the ...