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derivatives, OTC, Dodd-Frank Wall Street Reform and Consumer Protection Act


It is now accepted wisdom that it was the non-transparent, poorly capitalized and almost wholly unregulated over-the-counter (“OTC”) derivatives market that lit the fuse that exploded the highly vulnerable worldwide economy in the fall of 2008.[1] Because tens of trillions of dollars of these financial products were pegged to the economic performance of an overheated and highly inflated housing market, the sudden collapse of that market triggered under-capitalized OTC derivative guarantees of the subprime housing market; and the guarantors’ multi-trillion dollar interconnectedness with thousands of other OTC derivatives’ counterparties within that OTC market (through interest rate, currency, foreign exchange, and energy derivatives) required taxpayers to plug the huge capital holes that cascading nonpayment would have caused, thereby leading the world’s economy to crater.[2] As it now stands, the world is still in the midst of the worst financial crisis since the Great Depression of the 1930’s. This article explains the history of derivatives products, including the highly charged political events surrounding deregulation of these huge financial markets even in the face of mounting evidence of the danger that those unregulated instruments could cause the U.S. and world financial system.[3] The article then provides an overview of how recent Congressional OTC derivatives financial reform—Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”)—will substantially mitigate those risks if properly implemented by federal regulators, while at the same time allowing financial markets to thrive through ensuring capital adequacy, transparency and liquidity.[4] The article ends with a vision for what the financial system would look like if Dodd-Frank is implemented as its drafters intended.[5] [1]. See Ben Moshinsky, Stiglitz says Banks Should Be Banned From CDS Trading, BLOOMBERG.COM, Oct. 12, 2009, &sid=a65VXsI.90hs; Paul Krugman, Looters in Loafers, N.Y. TIMES, Apr. 18, 2010, Op-Ed available at; Alan S. Blinder, The Two Issues to Watch on Financial Reform—We Need an Independent Consumer Watchdog and Strong Derivatives Regulation. Industry Lobbyists are Trying to Water Them Down, WALL ST. J., Apr. 22, 2010, available at 804575197852294753766.html; Henry T. C. Hu, “Empty Creditors‟ and the Crisis, WALL ST. J., Apr. 10, 2009, at A13. [2]. See Moshinsky supra note 1; Krugman supra note 1; Blinder supra note 1; Hu supra note 1. [3]. Infra p. 122–23. [4]. Infra p. 144. [5]. Infra p. 148.

Publication Citation

6 Journal of Business & Technology Law 127 (2011)


Banking and Finance Law | Securities Law