How new regulation will bring with it the need for greater connectivity.
The sub-prime mortgage collapse of 2008 that almost brought
the financial sector to its knees has raised countless debates
and analysis into how financial markets and certain trading
practices are regulated. No asset class has come under the
microscope of the regulators more than derivatives, and for
good reason. As we know, it was the derivatives market that led
to massively leveraged debt during the global crisis.
However, it is specifically over-the-counter (OTC) derivatives,
contracts that are traded between two parties without going
through an exchange, which have been scrutinised by regulators
recently. Unfortunately, over three years on from the biggest
financial collapse in living memory, products such as credit
default swaps (CDS) and collatorised debt obligation (CDOs) are
still going strong.
In short, the very toxic debt that swamped the global economy
during the crisis is still very much out there. The OTC
derivative market is the largest market for derivatives, and is
still largely unregulated with respect to disclosure of
information between the banks, hedge funds and investors.
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