Derivatives in crisis: Policy choices for Europe

Derivatives are a tool to share risks in the economy and can thus provide a benefit to the economy.
The financial crisis has demonstrated that they can also pose significant risks to financial stability. These are related to the exponential growth in derivatives over the last decade, increasing leverage and interconnectedness of financial institutions.

This went largely unnoticed by markets and prudential supervisors, because derivative markets are predominantly organised in bilateral relationships, which makes them intransparent.
The article discusses policy tools to remedy the flaws in derivative markets, taking inspiration from a recent communication by the European Commission.

• Primary Source

ISPI: Policy Brief: Derivatives in crisis: Policy choices for Europe [PDF] http://www.ispionline.it/sites/default/files/pubblicazioni/pb_151_2009_0.pdf

---