Views on improving the integrity of global capital markets
09 March 2011

Derivatives Dithering Drives Dilemma

Posted In: Derivatives

In the just released CFA Institute Financial Market Integrity Outlook Survey (PDF), derivatives reigned supreme as the No. 1 global concern for financial markets. CFA Institute members in eight of the 16 largest markets surveyed indicated that use and disclosure of derivatives is the most serious ethical issue facing global markets in the coming year.

Clearly our members do not believe the efforts of regulators around the world have sufficiently addressed what Warren Buffett prophetically labeled “financial weapons of mass destruction.”

While much attention recently has focused on exchange trading and central clearing in the U.S. and Europe, it appears that calls for the globally coordinated derivatives framework we heard about in the wake of the financial crisis have largely disappeared, as individual countries carve out their own path in derivatives regulation before moving on to harmonize rules worldwide.

Will the incremental steps taken on derivatives serve us well in the next financial crisis (yes, there will be one – don’t pretend to be shocked)? Or will we look back and curse our complacency?

Our members say they are still concerned. Should you be?

About the Author(s)
Matt Orsagh, CFA, CIPM

Matt Orsagh, CFA, CIPM, is a senior director of capital markets policy at CFA Institute, where he focuses on corporate governance, ESG, and climate change analysis. He writes and speaks frequently on these topics on behalf of CFA Institute. His paper, Climate Change Analysis in the Investment Process was named “Best ESG Paper” by Savvy Investor in 2021.

2 thoughts on “Derivatives Dithering Drives Dilemma”

  1. Muhammad Usman Sheikh says:

    The entire edifice of ‘Derivative Instrument Trading’ has become a nondetachable infrastructure to the entire global financial industry. The problem does not lie in regulators trying their best to come up with any way for a derivatives trade to be made as transparently or as successfully as possible for both parties involved, rather it persists as an unwanted element in the anatomy of the system itself. If the the effects of these ‘Financial Weapons of Mass Destruction’ as they are infamously known as otherwise were considered in their true potential and in entirety , we would come to conclude that their mass effect is enough to take out 5 times our planet. (And maybe that’s just an understatement). It is a corrupt system that benefits only a small proportion of the society and since it self-righteously promotes inequality between people, this system will never prevail. However, the devise of these instruments has paved the way to glory for many investment banks and hedge funds, the true intentions of which are still not known till date. So I pose these two questions at the end, 1. Should these investment banks, hedge funds and other private wealth management firms who seek to profit not the society but themselves be considered as part of economic growth? 2. Has the so-called, self-proclaimed intellectual shift of the global financial industry, post the birth of these financial derivative instruments lead us to economic growth or economic prosperity?

  2. Matt Orsagh, CFA, CIPM says:

    Thanks for the comment. Like lots of aspects of the crisis, derivatives aren’t a panacea nor are they inherently bad – they have legitimate hedging uses, etc. But we know now that systemic risks posed by opaqueness need to be addressed; derivatives should be subject to more central clearing, and exchange traded where possible.

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