The Financial Implications and Necessity, or Lack Thereof, New Pending Regulation on Financial Derivatives

Acknowledgement

I would take this opportunity to thank my study supervisor, family and friends for their support and guidance without which this study would not have been possible.

DECLARATION

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Table of Contents

EXECUTIVE SUMMARY5

CHAPTER 1: INTRODUCTION7

Definition of derivatives7

Prudential measures in OTC to constrain risks to economic stability8

Background10

Market Structure and Regulation13

Over the Counter Market15

CHAPTER 2: LITERATURE REVIEW17

Impact of Financial Derivative over the Economy17

present position of equity derivative markets in appearing Asia17

Liberalization and conglomeration23

Importance of risk26

CHAPTER 3: METHODOLOGY30

The influence of risk-based guideline as a “tool of governance” on behaviors of controllers in the UK, Germany, Italy, and the USA30

The UK30

Impact of risk-based supervision30

Impact of meta regulation31

Germany36

Risk-based regulation and supervision in Germany36

Approach to risk-based guideline leveraged the degree of engagement of external auditors37

The influence of Basel II on German banking supervision38

Italy40

Risk-based approach to bank supervision in Italy40

The USA42

Risk-based supervision in the USA42

influence of Basel II on US financial guideline and supervision43

CHAPTER 4: RESULTS46

The present European hedge finance regulatory framework46

guideline of European hedge finance managers46

guideline of hedge finance products47

circulation of hedge finance products47

courses from the US model49

alterations on a pan-European basis50

Change by national regulators52

Anti-money laundering rules54

Data protection rules55

CHAPTER 5: CONCLUSION56

Meta-risk guideline: the way forward?58

trials to the further development of equity derivative markets in appearing Asia60

Over-the-counter (OTC) vs exchange-traded derivatives (ETD) - the most salient differences62

obligations for the development of well-functioning and steady derivative markets64

REFERENCES68

APPENDIX75

Executive Summary

economic derivatives permit users to organise or hedge certain business risks that arise from volatile product charges, interest rates, foreign currencies, and a broad variety of other variables. Derivatives furthermore permit possibly dodgy conjecture on future trends in those rates and prices. Derivatives markets are very large—measured in the hundreds of trillions of dollars—and they grew quickly in the years before the latest economic crisis. The events of the crisis have sparked calls for fundamental restructure. Derivatives are swapped in two types of markets: on regulated swaps and in an unregulated over-the-counter (OTC) market.

The reason of posting margin is to prevent a build-up of uncovered risk exposures like AIG's. Proponents of clarifying argue that if AIG had had to mail primary margin and variety margin on its deals in borrowing default swaps, it would likely have run out of money before its place became a systemic risk that resulted in exorbitant government intervention. advantages of mandatory clarifying encompass larger market transparency, as the clearinghouse monitors, notes and generally affirms trades. Clearing may decrease systemic risk, by mitigating the likelihood of nonpayment by counterparties.

There are also costs to clearing. Margin obligations enforce money demands on “end users” of derivatives, such as nonfinancial companies who used OTC agreements to hedge ...