Regulate OTC Derivatives by Deregulating Them
Lynn A. Stout
Cornell Law School - Jack G. Clarke Business Law Institute
University of South Carolina
Peter J. Wallison
American Enterprise Institute (AEI)
University of Houston - Department of Finance
Regulation, Vol. 32, No. 3, pp. 30-41, Fall 2009
UCLA School of Law, Law-Econ Research Paper No. 09-22
As a result of the current financial crisis, there have been many calls for strict new regulation of over-the-counter financial derivatives. This paper proposes, instead, that we return to the now-voided common law on derivatives and consider them non-legally enforceable gambling contracts except when one of the parties can prove a bona fide hedging purpose. Doing this would not outlaw derivatives, but would instead require the rise of private institutions to enforce and control them, and would discourage their use for wild speculation. The paper includes appended comments from Jean Helwege (Penn State University), Peter Wallison (American Enterprise Institute), and Craig Pirrong (University of Houston), as well as a response from the author.
Number of Pages in PDF File: 12
Keywords: OTC derivatives, derivatives, Irwin v. Williar, CDS, speculation, Commodities Futures Modernization Act
JEL Classification: G1, G13, K12, K22
Date posted: October 12, 2009 ; Last revised: November 1, 2009
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