Derivatives Contribution to Recession

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12/15/2012
Student number: 1563619|

Course Title: Financial Services
Lecturer Name: Cormac Kavanagh
Module/Subject Title: Derivatives Theory & Practice
Assignment Title: Derivatives in the Global Financial Crisis No of Words: 2500



Course Title: Financial Services
Lecturer Name: Cormac Kavanagh
Module/Subject Title: Derivatives Theory & Practice
Assignment Title: Derivatives in the Global Financial Crisis No of Words: 2500


Dublin business school| DERIVATIVES IN THE GLOBAL FINANCIAL CRISIS REPORT|

Dublin business school| DERIVATIVES IN THE GLOBAL FINANCIAL CRISIS REPORT|

Contents
I)Introduction:3
II)The contribution of the OTC (over the counter) Derivatives to the financial crisis 2007-20084
1)The collapse.4
2)What role of derivatives then.5
A)Fueled the housing bubble:5
b) Created the “too interconnected to fail”.6
c) Lack of transparency to monitor:6
d) They amplified the losses from the collapse of the housing bubble:7
III)The specific initiatives relating to derivatives [legislative and regulatory] being adopted by governments in response.8
1)The G20 summit 2009 in Pittsburgh8
A)The US Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), the Markets in Financial Instruments Directive/Regulation (MiFID II/ MiFIR) and the European Market Infrastructure Regulation (EMIR).9

The main Requirements.9
i)Reporting obligation applies to OTC transactions9
ii)Clearing obligation applies to eligible OTC transactions:9
iii)Margin requirement:10
iv)Capital requirement apply to uncleared OTC transactions:10
v)Authorization, registration and business conduct requirements:10
vi)Extraterritorial approach:10
B)The OTC Derivatives Market Reform in UK.11
IV)Conclusion12
V)appendix.12
1)appendix 1,13
2)appendix 215
3)appendix 315
VI)Works Cited16
VII)Bibliography18

I) Introduction:

* In the long time, the innovation in the Financial sectors seem to be continuous with many new financial instruments even though the number of instruments in the market is quite large already. The new instruments normally come from the combination of the previous instruments which were created to cope with the control of international transactions (Giddy, n.d.). With the help of the new financial instruments it make the system work more efficiently. Derivatives is new type of financial instruments, even it had been used a long time ago in the acient time (RealMarkits, n.d.). Derivatives are Swaps, Futures, Options and Forwards, are traditionally used to hedge. The parties of the derivatives are hedgers,who want the certainty, and speclulators who accept risk with the potential return. During the period of 2002 to 2008 the derivatives market boomed and there are some experts argue about its contribution to the crisis (FinancialTimes, 2010). Warren Buffet did consider the derivatives the mass destruction weapon in the financial sector due to the amount it carried and the low level of regulation applied on it. This paper is created with the purpose to provide the reader the understand about its contribution.

II) The contribution of the OTC (over the counter) Derivatives to the financial crisis 2007-2008

1) The collapse.
* According to Reavis (Reavis, 2009), the trigger of the global crisis was the collapse of the U.S mortgage. Dickerson suggested that due to the deregulation happened in 1970 and under the Clinton’s administration, the ability to access to mortgage and consumer loan increase significantly (Méchele, 2009).For a long time the price of house in US continuously increase, regular investors considered this the safest investment. Reavis argued that due to the easy policies in lending and aggressive profit making, bank extend mortgage to subprime mortgage which for people less qualified. For a...
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