Derivatives Expected to Face Heavier Regulation
The derivatives market has been widely derided as one of the reasons (but not the only) that we ended up with a global financial crisis and a recession. Indeed, these derivatives were complex financial instruments that many did not understand — or know how to value. Part of the problem of buying toxic assets right now is that no one really knows how much derivative-based assets are worth. In order to prevent the same sort of problem in the future, the Obama Administration is proposing tighter derivative regulation and requiring some measure of transparency. StockMarketFunding reports on the broad aims of the new regulatory moves:
As the AIG situation has made clear, massive risks in derivatives markets have gone undetected by both regulators and market participants. But even if those risks had been better known, regulators lacked the proper authorities to mount an effective policy response.
Today, to address these concerns, the Obama Administration proposes a comprehensive regulatory framework for all Over-The-Counter derivatives.
Moving forward, the Administration will work with Congress to implement this framework and bring greater transparency and needed regulation to these markets. The Administration will also continue working with foreign authorities to promote the implementation of similar measures around the world to ensure our objectives are not undermined by weaker standards abroad.
The real question, however, is whether such regulation can even be effective. Since derivatives are complex and very few people understand them, there is a question as to whether or not the regulators will even be qualified to know whether transparency is being practiced. Additionally, depending on whether or not an anti-regulatory mood sweeps the political and financial leaders in the future (as it did in the early 2000s), the regulations made today could be cast aside in a few years — possibly starting this cycle over again.
Personally, these types of investments, and all the excitement surrounding their regulation, is one of the reasons I stick with a boring investment strategy that includes buy and hold investing and index funds.
Disclaimer: I am not an investment professional. Nothing in this piece or on this Web site should be construed as investment advice. Before making investment decisions, do your own research and/or consult with an investment professional. All investment comes with the risk of loss. You are responsible for your own investment decisions and any loss that may result from your decisions.
