The year 2008 marks one of the worst financial crises since the Great Depression. This market crisis has caused a paradigm shift in the global financial and capital markets. During the period between 2008 and 2012, a number of complications were seen in the markets, ultimately leading to a collapse of many institutions. Credit risk and complex securitized products were priced incorrectly and insufficient risk management functions amplified the scale of risks transmitted within multiple channels across the global markets. This paper addresses these developments and explores the current state of regulatory convergence. It furthermore seeks to understand the optimum level of regulatory convergence in the derivatives market and evaluates the developments in the global derivative markets.
The primary focus is not on critically evaluating the highly technical aspects of regulatory developments but rather on assessing the practical outcomes derived from such changes. In addition, this paper also seeks to find an answer to achieve transformative changes by setting effective policies across the EU and the US derivatives landscape.
This paper is furthermore focused on the more recent technological advancements which have a direct impact on derivative trading activities. Taking into consideration that innovation has tended to outpace regulation throughout history, it attempts to answer the question of regulating two selected innovations: smart derivative contracts and derivative security tokens.
Table of Contents
Executive Summary
Introduction
Section 1: Overview of the Post-GFC Financial Derivatives Market
Part 1: Financial Derivatives Market Observations and Trends
Part 2: A Comparative Assessment of Regulatory Convergence Initiatives (EU-US Framework) and Global Harmonization Attempts in Financial Derivatives Market Regulations
Section 2: Smart Derivative Contracts and Derivative Security Tokens– An Analysis of Selected New Processes and Technologies in the Financial Derivatives Market
Part 1: Smart Derivative Contracts- the Legal Considerations and the Regulatory Governance Framework
Part 2: Derivative Security Tokens- the Legal Considerations and the Regulatory Governance Framework
Conclusion
Objectives and Topics
This paper examines the state of the global derivatives market post-2008 financial crisis (GFC) and evaluates the impact of recent technological innovations, specifically smart contracts and security tokens, on regulatory frameworks and market infrastructure.
- The evolution of derivative regulations and regulatory convergence post-GFC across EU and US jurisdictions.
- The role of centralized supervision and the impact of systemic risk on market participants.
- The disruption of traditional derivative trading and post-trading activities through blockchain technology and smart contracts.
- The potential for security tokens to serve as a novel form of collateralization in derivatives markets.
- The need for updated governance and legal frameworks to address the technical and regulatory challenges of digitalized financial assets.
Excerpt from the Book
Section 1
Today’s market-based finance favours complex financial instruments where firms are increasingly engaged in flexible financing techniques owing to the process of financial innovation. Derivatives are powerful tools to either hedge risks, arbitrage prices for speculative purposes or to reduce regulatory and agency costs. By definition, a derivative is a type of financial contract which is derived from at least one underlying asset. The value of the derivative directly depends on the value on the underlying asset(s). A derivative contract effectively looks at monetizing a right or obligation or payment flows between two parties.
The two parties engaging in a derivatives transaction may have an interest in speculating or transacting in order to monetize or mitigate their financial risk. In its purest form, derivatives represents a transfer of wealth. This financial instrument can be classified broadly into two categories:
i) Exchange-traded derivatives (ETDs) of which equity derivatives and commodity derivatives dominate the spectrum.
ii) Over-the-counter (OTC) derivatives such as fixed income, exchange rate derivatives, currency derivatives and interest rate derivatives. Interest rate derivatives have an approximate 68% market share and comprise nearly 75% of the entire derivatives market with a total market share of USD 452 trillion, followed by exchange rate derivatives with a market share of USD 53 trillion.
Summary of Chapters
Executive Summary: Provides an overview of the regulatory challenges following the 2008 financial crisis and the shift toward technological innovation in derivatives.
Introduction: Outlines the historical context of the GFC and the systemic risks that necessitated a paradigm shift in financial regulation.
Section 1: Overview of the Post-GFC Financial Derivatives Market: Analyzes market trends, the impact of the crisis on bank activities, and the push for greater regulatory convergence between the EU and the US.
Section 2: Smart Derivative Contracts and Derivative Security Tokens– An Analysis of Selected New Processes and Technologies in the Financial Derivatives Market: Investigates how blockchain technology, smart contracts, and security tokens are disrupting traditional financial market infrastructures.
Conclusion: Summarizes the need for a balance between fostering innovation and maintaining financial integrity through updated, globally harmonized regulatory standards.
Keywords
Derivatives, GFC, Regulatory Convergence, Systemic Risk, Smart Contracts, Blockchain, Distributed Ledger Technology (DLT), Security Tokens, Tokenization, Financial Stability, EMIR, Dodd-Frank Act, ESMA, Collateralization, Market Integrity.
Frequently Asked Questions
What is the primary focus of this research paper?
The paper provides a comparative assessment of derivative market regulations following the 2008 financial crisis and analyzes how emerging technologies like blockchain are reshaping these markets.
What are the main thematic areas covered?
The study covers post-GFC regulatory convergence, the role of centralized supervisory authorities, and the legal and technical implications of blockchain-based derivatives and tokenized assets.
What is the ultimate goal of the regulatory changes discussed?
The primary goal is to minimize systemic risk, enhance financial stability, and improve transparency in the derivatives landscape, particularly for OTC markets.
Which methodologies are employed in the study?
The research adopts a comparative, eclectic approach, synthesizing academic insights, international regulatory reports, and industry case studies to evaluate practical policy outcomes.
What does the paper address in its second part?
The second part focuses on technological advancements, specifically analyzing how smart derivative contracts and security tokens can eliminate intermediaries and streamline trade settlements.
Which key regulatory frameworks are analyzed?
The paper extensively discusses the EU's EMIR and MiFID II, and the US Dodd-Frank Act, highlighting their differences in approach and efforts toward international harmonization.
How do smart contracts change the traditional derivative model?
Smart contracts automate the execution of contractual obligations based on pre-programmed conditions, removing the need for intermediaries and reducing manual reconciliation processes.
What challenges do security tokens present for regulators?
Regulators face difficulties in determining the legal status of tokenized assets, ensuring record-keeping consistency, and addressing the lack of global legal harmonization for cross-border transactions.
What is the significance of the "Single Europe" approach?
It represents the effort by EU institutions to centralize and harmonize financial supervision to ensure consistency across Member States and facilitate more effective market oversight.
Why is regulatory convergence between the EU and US considered difficult?
Differences in legislative mandates, varying priorities (rule-based vs. principle-based approaches), and the rise of nationalistic agendas create significant barriers to achieving a uniform global standard.
- Arbeit zitieren
- Mert Ozenay (Autor:in), 2019, Assessment of post-GFC derivative regulations and impact of new processes and technologies in the financial derivatives sector, München, GRIN Verlag, https://www.grin.com/document/468586
