Regulation of Derivatives

Abstract

Modern derivatives are today are credited as the major cause of the current global economic crisis and many countries have reviewed their financial sector regulatory structures since the global financial crisis. In many cases countries substantially increased the regulatory burden of derivative transactions. In New Zealand, most derivatives activity occurs between banks (which are well regulated by the Reserve Bank) and parts of the New Zealand’s derivatives market work well. However there is a lack of risk management products for important areas, such as agricultural commodities. In addition, the current regulation of derivative transactions in New Zealand is outdated and inefficient. The regime is effectively either all or nothing – exchanges are either fully regulated or comply with a robust regulatory regime (e.g. NZX), or are outside of the regime. In this paper, I examine the most common types of derivatives and the current regulatory framework within which derivatives are traded and inconsistencies associated with the regime. Lastly, I address the Ministry of Economic Development’s proposals to reform the regulation of derivative transactions and what the potential impact of the proposals would be.