IDEAS home Printed from https://ideas.repec.org/a/eee/jcecon/v41y2013i2p386-400.html
   My bibliography  Save this article

Diverging derivatives: Law, governance and modern financial markets

Author

Listed:
  • Carruthers, Bruce G.

Abstract

This paper examines the institutional, political and regulatory history of U.S. derivatives markets from the 1980s until the financial crisis of 2008 to understand the divergence between exchange-traded derivatives and over-the-counter derivatives. Although exchanges like the Chicago Mercantile Exchange and Chicago Board of Trade were powerful market incumbents with strong political connections, they were eclipsed by the over-the-counter market. The latter remained unregulated, despite numerous attempts to do so, and grew to enormous size. With such growth, the political decision not to regulate became increasingly irreversible, even in the face of events like the failure of Long Term Capital Management. The implications for law and the politics of financial regulation are discussed.

Suggested Citation

  • Carruthers, Bruce G., 2013. "Diverging derivatives: Law, governance and modern financial markets," Journal of Comparative Economics, Elsevier, vol. 41(2), pages 386-400.
  • Handle: RePEc:eee:jcecon:v:41:y:2013:i:2:p:386-400
    DOI: 10.1016/j.jce.2013.03.010
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0147596713000437
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Robert A. Jarrow, 2011. "The Economics of Credit Default Swaps," Annual Review of Financial Economics, Annual Reviews, vol. 3(1), pages 235-257, December.
    2. Franklin R. Edward, 1999. "Hedge Funds and the Collapse of Long-Term Capital Management," Journal of Economic Perspectives, American Economic Association, vol. 13(2), pages 189-210, Spring.
    3. repec:dau:papers:123456789/263 is not listed on IDEAS
    4. Gary Gorton & Richard Rosen, 1995. "Banks and Derivatives," NBER Chapters,in: NBER Macroeconomics Annual 1995, Volume 10, pages 299-349 National Bureau of Economic Research, Inc.
    5. Tufano, Peter, 1989. "Financial innovation and first-mover advantages," Journal of Financial Economics, Elsevier, vol. 25(2), pages 213-240, December.
    6. Scholes, Myron S, 1998. "Derivatives in a Dynamic Environment," American Economic Review, American Economic Association, vol. 88(3), pages 350-370, June.
    7. René M. Stulz, 2004. "Should We Fear Derivatives?," Journal of Economic Perspectives, American Economic Association, vol. 18(3), pages 173-192, Summer.
    8. Eli M. Remolona, 1992. "The recent growth of financial derivative markets," Quarterly Review, Federal Reserve Bank of New York, issue Win, pages 28-43.
    9. Darrell Duffie, 2010. "The Failure Mechanics of Dealer Banks," Journal of Economic Perspectives, American Economic Association, vol. 24(1), pages 51-72, Winter.
    10. Franklin R. Edwards & Frederic S. Mishkin, 1995. "The decline of traditional banking: implications for financial stability and regulatory policy," Economic Policy Review, Federal Reserve Bank of New York, issue Jul, pages 27-45.
    11. Gorton, Gary B., 2010. "Slapped by the Invisible Hand: The Panic of 2007," OUP Catalogue, Oxford University Press, number 9780199734153.
    12. Tett, G., 2010. "Silos and silences. Why so few people spotted the problems in complex credit and what that implies for the future," Financial Stability Review, Banque de France, issue 14, pages 121-129, July.
    13. Stephen Cecchetti & Enisse Kharroubi, 2012. "Reassessing the impact of finance on growth," BIS Working Papers 381, Bank for International Settlements.
    14. Raghuram G. Rajan, 2005. "Has financial development made the world riskier?," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, issue Aug, pages 313-369.
    15. Philippe Jorion, 2010. "Risk Management," Annual Review of Financial Economics, Annual Reviews, vol. 2(1), pages 347-365, December.
    16. Darrell Duffie, 2012. "Dark Markets: Asset Pricing and Information Transmission in Over-the-Counter Markets," Economics Books, Princeton University Press, edition 1, number 9623.
    17. William Lazonick, 2010. "Innovative Business Models and Varieties of Capitalism: Financialization of the U.S. Corporation," Business History Review, Harvard Business School, vol. 84(4), pages 675-702, December.
    18. Reena Aggarwal & Sandeep Dahiya, 2006. "Demutualization and Public Offerings of Financial Exchanges," Journal of Applied Corporate Finance, Morgan Stanley, vol. 18(3), pages 96-106.
    19. Kroszner, Randall S, 1999. "Can the Financial Markets Privately Regulate Risk? The Development of Derivatives Clearinghouses and Recent Over-the-Counter Innovations," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(3), pages 596-618, August.
    20. Telser, Lester G, 1981. "Why There Are Organized Futures Markets," Journal of Law and Economics, University of Chicago Press, vol. 24(1), pages 1-22, April.
    21. Keith C. Brown & Donald J. Smith, 1993. "Default Risk and Innovations in the Design of Interest Rate Swaps," Financial Management, Financial Management Association, vol. 22(2), Summer.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Pistor, Katharina, 2013. "Law in Finance," Journal of Comparative Economics, Elsevier, vol. 41(2), pages 311-314.
    2. repec:krk:eberjl:v:2:y:2014:i:4:p:71-83 is not listed on IDEAS
    3. Pistor, Katharina, 2013. "A legal theory of finance," Journal of Comparative Economics, Elsevier, vol. 41(2), pages 315-330.

    More about this item

    Keywords

    Exchange-traded derivatives; OTC derivatives; Financial regulation;

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • K2 - Law and Economics - - Regulation and Business Law
    • N20 - Economic History - - Financial Markets and Institutions - - - General, International, or Comparative

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jcecon:v:41:y:2013:i:2:p:386-400. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu). General contact details of provider: http://www.elsevier.com/locate/inca/622864 .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.