Credit Derivatives Law
In the closing years of the 2000s, an epic financial collapse occurred worldwide. Some of this fallout can be traced back to the use of credit derivatives. Since this crisis, legal debates have surrounded their use and argued for limitations.
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History and Context
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Because the value of a credit derivative is gleaned from its underlying risk, investors were enticed by the huge payouts that can result from their potential realization. The Obama administration has been particularly adamant about enshrining controls over these mechanisms and averting future threats to economic stability.
Debate
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One of the essential debates surrounding credit derivatives and law is whether or not these derivatives constitute a form of insurance as they provide security against loss. Opponents of this position claim that other forms of financial exchange also contain securities yet are not insurance. If the adopted legal position recognizes derivatives as a form of insurance, then states and federal authorities will be able to regulate them.
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Recent Initiatives
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As of 2010, most regulatory laws are still in developmental stages. The Obama administration has proposed a treasury framework to help buttress the financial system against systemic failures linked to derivatives. Among other mechanisms, the proposal calls for greater registration standards with the Securities and Exchange Commission and limiting withdrawal opportunities from money market funds. At least two states, New York and Missouri, have issued insurance bulletins requiring firms to treat credit derivatives similarly to insurance contracts.
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References
- Photo Credit Wall Street sign image by Jolanta Zastocki from Fotolia.com
