Chapter 4: Regulating Complex Derivatives: Can the Opaque be Made Transparent?
4. Regulating complex derivatives: Can the opaque be made transparent? Michael A.H. Dempster, Elena A. Medova and Julian Roberts1 INTRODUCTION The response to the financial crisis of 2007–2009 has so far been largely concerned with proposals for sharpening the national and international regulatory framework, for example, by restricting institutions like hedge funds and private equity firms and practices like short selling and credit default swap (CDS) trading, requiring exchange trading of complex derivatives like CDSs, or increasing the regulatory capital requirements on financial institutions. But it may well be that the deregulation of Thatcher and Reagan and their successors throughout the Greenspan years led to a situation that had less to do with Schumpeterian ‘creative destruction’ than with the abuse of market power. In the words of Robert Khuzami, SEC Enforcement Director, regarding the recent civil fraud suit involving a subprime mortgage bond or collateralised debt obligation (CDO) brought against Goldman Sachs, ‘the product was new and complex but the deception and conflicts (of interest) are old and simple’. The exact role played by derivatives in the financial crisis is of course controversial.2 However, derivative deals of many kinds have been This chapter was presented at the Law Reform and Financial Markets W.G. Hart Legal Workshop at the Institute for Advanced Legal Studies of the University of London on 24 June 2009 and at the Münchner Kompetenz Zentrum Ethik Seminar of the Ludwig Maximilians Universität, Munich on 9 July 2009. We are grateful to the participants and...
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