Nothing has advanced the practice of modern finance quite as much as derivatives. And in the process, it is exchanges that have played the crucial role, creating the benchmark contracts that provide a solid, trustworthy and useful foundation for all manner of risk pricing and transfer. Yet today, derivatives – and especially the exchange-traded (or listed) variety – are under pressure in various ways, and vulnerable to sub-optimal public-policy choices.
As an alternative to that, the WFE believes that the role of lit, public markets in bringing the benefits of derivatives safely to a wide range of participants should be acknowledged and embraced. The use of derivatives should be encouraged rather than discouraged, supported by financial education, because risk is inherent in financial markets, while derivatives represent the best – and sometimes the only way – to manage it. The growth of derivatives over the past decade and more is indicative of their utility and it is best that their use be encouraged, such that they can more readily be kept in a relatively controlled environment. The real risk is that regulatory, tax or other measures push customers into a less well-regulated place. As the rise of some crypto offerings has shown, this can happen quickly and broadly. And let us remember that the G20 in 2009 chose not to restrict derivatives but to ensure they were traded in the best possible environment.
This paper, prepared by the Regulatory Affairs team of the World Federation of Exchanges, analyses why derivatives exist and why the exchange-traded markets are vital to the health of the system.