The folly of deregulation

By Henry C K Liu

On October 7, 2009, the United States House of Representatives Committee on Financial Services at long last held a public hearing on "Reform of the Over-the-Counter (OTC) Derivative Market: Limiting Risk and Ensuring Fairness".

OTC derivatives are contracts executed outside the regulated exchange environment whose values depend on (or derive from) the values of underlying assets, reference rates or indexes. Market participants use these instruments to perform a wide variety of useful risk management functions. The Bank of International Settlement (BIS) reports that the notional value of all outstanding OTC derivative contracts ending June 2009 was US$49.2 trillion worldwide against a 2009 world gross domestic product (GDP) of $65.6 trillion.